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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934 For the transition period from _______ to _______
Commission File Number 1-3492
HALLIBURTON COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-2677995
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201
(Address of principal executive offices)
Telephone Number - Area code (214) 978-2600
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange on
Title of each class which registered
------------------- ----------------
Common Stock par value $2.50 per share New York Stock Exchange
Baroid Corporation 8% Guaranteed Senior Notes due 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by nonaffiliates on January 29,
1999, determined using the per share closing price on the New York Stock
Exchange Composite tape of $29.69 on that date was approximately
$13,028,800,000.
As of January 29, 1999, there were 440,201,382 shares of Halliburton Company
Common Stock $2.50 par value per share outstanding.
Portions of the Halliburton Company Proxy Statement dated March 25, 1999, are
incorporated by reference into Part III of this report.
PART I
Item 1. Business.
General Development of Business. Halliburton Company's predecessor was
established in 1919 and incorporated under the laws of the State of Delaware in
1924. Halliburton Company (the Company) provides energy services, engineering
and construction services and manufactures products for the energy industry.
Information related to acquisitions and dispositions is set forth in Note 14 to
the financial statements of this annual report.
Financial Information About Business Segments. The Company is comprised
of three business segments. See Note 2 to the financial statements of this
annual report for financial information about these three business segments.
Description of Services and Products. The following is a summary which
briefly describes the Company's services and products for each business segment.
The Energy Services Group segment provides a wide range of services and
products to provide both discrete services and products and integrated solutions
to customers in the exploration, development and production of oil and natural
gas. The Energy Services Group operates worldwide, serving major oil companies,
independent operators and national oil companies. The segment includes
Halliburton Energy Services (HES), which offers pressure pumping equipment and
services, logging and perforating products and services, drilling systems and
services, drilling fluid systems, drill bits, specialized completion and
production equipment and services and well control products and services; Brown
& Root Energy Services, which provides upstream oil and gas engineering,
procurement and construction, project management and production services, subsea
construction, fabrication and installation of onshore and offshore pipelines,
offshore and production platforms, marine engineering and other marine related
projects; Landmark Graphics Corporation, which provides integrated exploration
and production information systems and professional services; and Halliburton
Energy Development (HED), which creates business opportunities for the
development, production and operation of oil and gas fields in conjunction with
the Company's customers. In March 1999, HED was combined with HES.
The Engineering and Construction Group segment provides: conceptual
design, process design, detailed engineering, procurement, project and
construction management; construction of chemical and petrochemical plants,
refineries, liquefied natural gas (LNG) and gas processing facilities, pulp and
paper mills, metal processing plants, airports, water and wastewater systems;
technical and economic feasibility studies; site evaluation; repair and
refitting of submarines and surface ships; operations and maintenance services,
and engineering, logistics and wastewater management services for commercial
industry, utilities and government customers.
The Dresser Equipment Group segment designs, manufactures and markets
highly engineered products and systems for oil and gas producers, transporters,
processors, distributors and users throughout the world. Products and systems of
this segment include compressors, turbines, generators, electric motors, pumps,
engines and power systems, valves and controls, instruments, meters and pipe
couplings, blowers and gasoline dispensing systems.
Markets and Competition. The Company is one of the world's largest
diversified energy services and engineering and construction services companies.
The Company's services and products are sold in highly competitive markets
throughout the world. Competitive factors impacting sales of the Company's
services and products are: price, service (including the ability to deliver
services and products on an "as needed, where needed" basis), product quality,
warranty and technical proficiency. A growing number of customers are now
indicating a preference for integrated services and solutions. These integrated
services and solutions, in the case of the Energy Services Group, relate to
all phases of exploration, development and production of oil and gas, and in
the case of the Engineering and Construction Group, relate to all phases of
design, procurement, construction project management and maintenance of a
facility. Demand for these types of integrated services and solutions is based
primarily upon quality of service, technical proficiency and value created.
The Company conducts business worldwide in over 120 countries. Since
the markets for the Company's services and products are so large and cross many
geographic lines, a meaningful estimate of the number of competitors cannot be
made. These markets are, however, highly competitive with many substantial
companies operating in each market. Generally, the Company's services and
products are marketed through its own servicing and sales organizations. A small
1
percentage of sales of the Energy Service Group's and Dresser Equipment Group's
products is made by supply stores and third-party representatives.
Operations in some countries may be adversely affected by unsettled
political conditions, expropriation or other governmental actions, and exchange
control and currency problems. The Company believes the geographic
diversification of its business activities reduces the risk that loss of its
operations in any one country would be material to the conduct of its operations
taken as a whole. Information regarding the Company's exposures to foreign
currency fluctuations, risk concentration and financial instruments used to
minimize risk is included in management's discussion and analysis of financial
condition and results of operations under the caption "Financial Instrument
Market Risk" and in Note 15 to the financial statements of this annual report.
Customers and Backlog. In 1998, 1997, and 1996, respectively, 85%, 84%
and 81% of the Company's revenues were derived from the sale of products and
services to, including construction for, the energy industry. Approximately 10%
of the total backlog at December 31, 1998 was for equipment manufacturing
contracts. The following schedule summarizes the backlog of engineering and
construction projects and equipment manufacturing contracts at December 31, 1998
and 1997:
Millions of dollars 1998 1997
--------------------------------------------------------------------------------
Firm orders $10,472 $12,087
Government orders firm but not yet funded,
letters of intent and contracts awarded but
not signed 705 591
--------------------------------------------------------------------------------
Total $11,177 $12,678
--------------------------------------------------------------------------------
It is estimated that 65% of the backlog existing at December 31, 1998
will be completed during 1999. The Company's backlog excludes contracts for
recurring hardware and software maintenance and support services. Backlog is not
necessarily indicative of future operating results because backlog figures are
subject to substantial fluctuations. Arrangements included in backlog are in
many instances extremely complex, nonrepetitive in nature and may fluctuate in
contract value. Many contracts do not provide for a fixed amount of work to be
performed and are subject to modification or termination by the customer. Due to
the size of certain contracts, the termination or modification of any one or
more contracts or the addition of other contracts may have a substantial and
immediate effect on backlog.
Raw Materials. Raw materials essential to the Company's business are
normally readily available. Where the Company is dependent on a single supplier
for any materials essential to its business, the Company is confident that it
could make satisfactory alternative arrangements in the event of an interruption
in the supply of such materials.
Research, Development and Patents. The Company maintains an active
research and development program to assist in the improvement of existing
products and processes, the development of new products and processes and the
improvement of engineering standards and practices that serve the changing needs
of its customers. Information relating to expenditures for research and
development is included in Note 1 and Note 2 to the financial statements of this
annual report.
The Company owns a large number of patents and has pending a
substantial number of patent applications covering various products and
processes. The Company is also licensed under patents owned by others. The
Company does not consider a particular patent or group of patents to be material
to the Company's business.
Seasonality. Weather and natural phenomena can temporarily affect the
performance of the Company's services. Winter months in the Northern Hemisphere
tend to affect operations negatively, but the widespread geographical locations
of the Company's operations serve to mitigate the seasonal nature of the
Company's business.
Employees. At December 31, 1998, the Company employed approximately
107,800 people.
Regulation. The Company is subject to various environmental laws and
regulations. Compliance with such requirements has not substantially increased
capital expenditures, adversely affected the Company's competitive position or
2
materially affected the Company's earnings. The Company does not anticipate any
material adverse effects in the foreseeable future as a result of existing
environmental laws and regulations. Note 10 to the financial statements of
this annual report discusses the Company's involvement as a potentially
responsible party in the remedial activities to clean up several "Superfund"
sites.
Item 2. Properties.
Information relating to lease payments is included in Note 10 to the
financial statements of this annual report. The Company's owned and leased
facilities, as described below, are suitable for their intended use.
Energy Services Group manufacturing facilities owned by the Company
cover approximately 4.9 million square feet. Principal locations of these
manufacturing facilities are Tulsa and Duncan, Oklahoma; Alvarado, Amarillo,
Carrollton, Dallas, Fort Worth, Garland, Longview, and Houston, Texas; Colorado
Springs, Colorado; Arbroath, Scotland; Reynosa, Mexico; Newcastle and
Manchester, England, and Maturin Mongas, Venezuela. An idle facility in Davis,
Oklahoma was sold in 1998. The facility in Amarillo is idle. The manufacturing
facility in Garland, Texas is leased to another company. The Energy Services
Group also leases manufacturing facilities covering approximately 608,000 square
feet. Principal locations of these facilities are Malvern, Pennsylvania;
Houston, Texas; Jurong, Singapore; Panama City, Florida;
Basingstoke, England; and Calgary, Alberta, Canada. The facilities in
Basingstoke, England are subleased to another company.
Research, development and engineering activities are carried out in owned
facilities covering approximately 460,000 square feet. The major sites are in
Houston, Austin and Carrollton, Texas; Duncan, Oklahoma; and Aberdeen, Scotland;
and in leased facilities covering approximately 300,000 square feet in Houston,
Texas; Englewood and Denver, Colorado; Leatherhead and Dorking, England;
Leiderdrop, Holland; and Singapore. The facility in Dorking, England was idle
at the end of 1998. The Energy Services Group marine fabrication facilities
owned by the Company cover approximately 550 acres in Belle Chasse, Louisiana;
Greens Bayou, Texas; and Nigg and Wick, Scotland. The Belle Chasse, facility is
leased to another company and the facility in Nigg, Scotland is leased to a
joint venture of the Company. The Energy Services Group has 13 grinding
facilities owned or leased by the Company. The Energy Services Group also has
mineral rights to proven and prospective reserves of barite and bentonite.
Such rights included leaseholds and mining claims and property owned in
fee. Based on the number of tons of each of the above minerals consumed
in fiscal 1998, the Company estimates its reserves, which it considers to be
proven, to be sufficient for operations for the foreseeable future. In
addition, service centers, sales offices and field warehouses are operated at
approximately 290 locations in the United States, almost all of which are
owned, and at approximately 360 locations outside the United States in both the
Eastern and Western Hemispheres.
Engineering and Construction Group fabricating facilities cover
approximately 468,000 square feet in Houston, Texas and Edmonton, Canada, of
which 388,000 square feet in Houston is leased to another company. Engineering
and design, project management and procurement services activities are carried
out in owned facilities covering approximately 650,000 square feet. Major sites
of these activities are Houston and Baytown, Texas; Edmonton, Canada; Bundaberg
and Emerald, Australia; Plymouth and Greenford, England. These activities are
also carried out at leased facilities covering approximately 1.4 million square
feet. Major sites are in Mobile, Alabama; Alhambra, California; London,
England; Parkside, Victoria Park, Milton and Melbourne, Australia. The
Engineering and Construction Group operates dockyard facilities owned by a 51%
owned subsidiary of the Company covering approximately 155 acres in Plymouth,
England. Approximately 27 acres of this facility are subleased. In addition,
project offices, field camps, service centers, and sales offices are operated at
approximately 10 locations in the United States, almost all of which are
owned, and at approximately 15 locations outside the United States in both
the Eastern and Western Hemispheres.
Dresser Equipment Group owns approximately 9.9 million square feet of
manufacturing facilities. Major sites are in Austin, Stafford and Houston,
Texas; Broken Arrow, Oklahoma; Painted Post, Olean and Wellsville, New York;
Minneapolis, Minnesota; Stratford, Connecticut; Berea, Kentucky; Bradford,
Pennsylvania; Salisbury, Maryland; Waukesha, Wisconsin; Avon, Massachusettes;
Connersville, Indiana; Einbeck, Germany; Naples and Voghera, Italy; Malmo,
Sweden; LeHavre and Conde, France; Huddersfield, England; Bonnyrigg and
Petreavie, Scotland; and Rio de Janeiro, Brazil. Dresser Equipment Group
leases approximately 1.4 million square feet of manufacturing facilities. The
major sites are in Houston, Texas; Shanghai, China; Kongsberg, Norway; and
Salisbury, Maryland. In addition, service centers, sales offices and field
warehouses are operated at approximately 75 locations in the United States,
almost all of which are owned, and at approximately 65 locations outside the
United States in both the Eastern and Western Hemispheres.
3
General Corporate operates from leased facilities in Dallas, Texas
covering approximately 25,000 square feet. The Company also leases approximately
5,500 square feet of space in Washington, D.C. The Company owns approximately
1 million square feet of office and campus space in Houston, Texas which is
occupied by multiple business units and shared services groups who conduct
administrative, procurement, and engineering design activities. These activities
are carried on in leased facilities covering approximately 100,000 square feet
in Surrey and Eastleigh, England. The Company also owns approximately 203,000
square feet of office and campus space in Leatherhead, England where multiple
business units and shared services groups conduct administrative, procurement
and engineering design activities.
Due to the acquisition (the Merger) of Dresser Industries, Inc.
(Dresser), and in response to the industry downturn due to declining oil and gas
prices, the Company has certain manufacturing, administrative and service
support facilities that are no longer fully utilized. The Company has enacted
plans to vacate facilities that are now considered excess. In 1998, the Company
recorded facility consolidation charges of $126.2 million to provide for the
costs to dispose of owned properties or exit leased facilities. See Note 7 to
the annual consolidated financial statements for additional information on the
facility consolidations.
Item 3. Legal Proceedings.
Information relating to various commitments and contingencies is
described in Note 10 to the financial statements of this annual report.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the fourth quarter of 1998.
4
Executive Officers of the Registrant.
The following table indicates the names and ages at December 31, 1998
of the executive officers of the registrant along with a listing of all offices
held by each during the past five years:
Name and Age Offices Held and Term of Office
- ------------ -------------------------------
* William E. Bradford Chairman of the Board, since September 1998
(Age 63) Director of Registrant, since September 1998
Chairman of the Board of Dresser Industries,
Inc., December 1996 to September 1998
Chief Executive Officer of Dresser Industries,
Inc., November 1995 to September 1998
President of Dresser Industries, Inc., March 1992
to December 1996
Chief Operating Officer of Dresser Industries,
Inc., March 1992 to November 1995
Jerry H. Blurton Vice President and Treasurer, since July 1996
(Age 54) Vice President - Finance & Administration of
Halliburton Energy Services, August 1995 to
July 1996
Vice President - Finance, 1991 to August 1995
* Richard B. Cheney Chief Executive Officer, since October 1995
(Age 57) Director of Registrant, since October 1995
Chairman of the Board, January 1996 to September
1998
President, October 1995 to May 1997
Senior Fellow, American Enterprise Institute,
1993 to October 1995
Secretary, U.S. Department of Defense, 1989
to 1993
Lester L. Coleman Executive Vice President and General Counsel,
(Age 56) since May 1993
President of Energy Services Group, September
1991 to May 1993
* David J. Lesar President and Chief Operating Officer, since
(Age 45) May 1997
President and Chief Executive Officer of Brown &
Root, Inc., since September 1996
Executive Vice President and Chief Financial
Officer, August 1995 to May 1997
Executive Vice President of Finance and
Administration of Halliburton Energy
Services, November 1993 to August 1995
Partner, Arthur Andersen LLP, 1988 to November
1993
Gary V. Morris Executive Vice President and Chief Financial
(Age 45) Officer, since May 1997
Senior Vice President - Finance, February 1997
to May 1997
Senior Vice President, May 1996 to February 1997
Vice President - Finance of Brown & Root, Inc.,
June 1995 to May 1996
Vice President - Finance of Halliburton Energy
Services, December 1993 to June 1995
Controller, December 1991 to December 1993
R. Charles Muchmore, Jr. Vice President and Controller, since August 1996
(Age 45) Finance & Administration Director - Europe/Africa
of Halliburton Energy Services, September
1995 to August 1996
Regional Finance & Administration Manager -
Europe/Africa of Halliburton Energy Services,
December 1989 to September 1995
5
Executive Officers of the Registrant (continued).
Name and Age Offices Held and Term of Office
- ------------ -------------------------------
Lewis W. Powers Senior Vice President, since May 1996
(Age 52) Vice President - Europe/Africa of Halliburton
Energy Services, April 1993 to May 1996
Senior Vice President of Operations of Otis
Engineering, June 1989 to April 1993
Louis A. Raspino Shared Services Vice President - Finance,
(Age 46) effective March 1999
Senior Vice President - Strategic Planning &
Business Development, Burlington Resources,
Inc. (oil and gas exploration and
production), October 1997 to June 1998
Senior Vice President and Chief Financial
Officer, Louisiana Land & Exploration Company
(oil and gas exploration, production and
refining), September 1995 to October 1997
Treasurer, Louisiana Land & Exploration Company,
1992 to September 1995
* Donald C. Vaughn Vice Chairman, since September 1998
(Age 62) President and Chief Operating Officer of Dresser
Industries, Inc., December 1996 to
September 1998
Executive Vice President, Dresser Industries,
Inc., November 1995 to December 1996
Senior Vice President - Operations, Dresser
Industries, Inc., January 1992 to
November 1995
Chairman, President and Chief Executive Officer
of M. W. Kellogg, Inc., June 1995 to
June 1996
Chairman and Chief Executive Officer of The M. W.
Kellogg Company, September 1986 to June 1996
President of The M. W. Kellogg Company, November
1983 to June 1995
* Members of the Executive Committee of the registrant.
There are no family relationships between the executive officers of the
registrant.
6
PART II
Item 5.Market for the Registrant's Common Stock and Related Stockholder Matters.
The Company's common stock is traded on the New York Stock Exchange and
the Swiss Exchange. Information relating to market prices of common stock and
quarterly divided payment is included under the caption "Quarterly Data and
Market Price Information" on page 55 of this annual report. Cash dividends on
common stock for 1997 and 1998 were paid in March, June, September and December
of each such year. The board of directors of Halliburton (the Board) intends
to consider the payment of quarterly dividends on the outstanding shares of
Halliburton common stock. The declaration and payment of future dividends,
however, will be at the discretion of the Board and will depend upon, among
other things, future earnings of Halliburton, its general financial condition,
the success of its business activities, its capital requirements and general
business conditions. At December 31, 1998, there were approximately 27,665
shareholders of record. In calculating the number of shareholders, the Company
considers clearing agencies and security position listings as one shareholder
for each agency or listing.
Item 6. Selected Financial Data.
Information relating to selected financial data is included on pages
52 through 54 of this annual report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Information relating to management's discussion and analysis of
financial condition and results of operations is included on pages 9 through
18 of this annual report.
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk.
Information relating to market risk is included in management's
discussion and analysis of financial condition and results of operations under
the caption "Financial Instrument Market Risk" on pages 14 through 15 of this
annual report.
7
Item 8. Financial Statements and Supplementary Data.
Page No.
Report of Arthur Andersen LLP, Independent Public Accountants 19
Responsibility for Financial Reporting 20
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 21
Consolidated Balance Sheets at December 31, 1998 and 1997 22
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 23
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996 24-25
Notes to Financial Statements
1. Significant accounting policies 26
2. Business segment information 28
3. Inventories 30
4. Property, plant and equipment 30
5. Related companies 30
6. Income taxes 32
7. Special charges and credits 34
8. Lines of credit, notes payable and long-term debt 37
9. Dresser financial information 38
10. Commitments and contingencies 38
11. Income per share 41
12. Common stock 41
13. Series A junior participating preferred stock 43
14. Acquisitions and dispositions 44
15. Financial instruments and risk management 46
16. Retirement plans 47
Quarterly Data and Market Price Information 55
The related financial statement schedules are included under Part IV,
Item 14 of this annual report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
8
HALLIBURTON COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
HALLIBURTON / DRESSER MERGER
On September 29, 1998, the acquisition (the Merger) of Dresser
Industries, Inc. (Dresser) by the Company was completed. The Merger was
accounted for using the pooling of interests method of accounting for business
combinations. Accordingly, the Company's financial statements have been restated
to include the results of Dresser for all periods presented. See Note 14 to the
annual consolidated financial statements. Prior to the Merger, Dresser was a
diversified company with operations in three business segments: Petroleum
Products and Services; Engineering Services; and Energy Equipment. Prior to the
Merger, the Company operated in two business segments, the Energy Group and the
Engineering and Construction Group. Following the Merger, the Company is
organized around three business segments: Energy Services Group; Engineering and
Construction Group; and Dresser Equipment Group.
Management of the Company believes the Merger provides the Company with
the opportunity to better meet customer needs, to improve its technology, to
strengthen its product service lines, to cut costs, and to position the Company
for the future.
BUSINESS ENVIRONMENT
The Company operates in over 120 countries around the world to provide
a variety of energy services, energy equipment and engineering and construction
services to energy, industrial and governmental customers. The industries served
by the Company are highly competitive, with many substantial competitors.
Operations in some countries may be affected by unsettled political conditions,
expropriation or other governmental actions, exchange controls and currency
fluctuations. The Company believes the geographic diversification of its
business activities reduces the risk that loss of its operations in any one
country would be material to its consolidated results of operations.
The majority of the Company's revenues are derived from the sale of
services and products, including construction activities, to the energy
industry. The Company offers a comprehensive range of integrated and discrete
services and products, as well as project management for oil and natural gas
activities throughout the world. The decline in oil and gas prices in 1998
caused a decrease in the worldwide average rotary drilling rig count and sharply
reduced demand for some of the Company's products and services. In response to
weakening demand in some areas of the world, the Company has implemented plans
to reduce the number of employees in those geographic areas where activity
levels have declined, to scale back discretionary spending on capital
expenditures and to curtail discretionary travel and other expenses. The Company
has also taken steps to reduce its workforce and rationalize assets to eliminate
duplicate resources in connection with the Merger.
Oil and gas prices, global and regional economic growth rates and the
resulting demand for products created from hydrocarbons affect the spending
decisions of the Company's customers. Despite the current economic
uncertainties, over the long term the Company believes steadily rising
population and greater industrialization efforts will continue to propel global
growth, particularly in developing nations. These factors will also cause
increasing demand for oil and natural gas to supply growing needs for refined
products, petrochemicals, fertilizers, and power.
Energy Services Group. During 1998, particularly in the second half of
the year, the energy industry experienced a downturn brought about by a
combination of factors that began in late 1997. Decreased demand in Asia for
crude oil, increases in production from OPEC producers, added production
increases from Iraq and unseasonably warm winters in North America during 1997
and 1998 all contributed to the industry downturn experienced during 1998.
Throughout 1998, crude oil prices varied from $4 to $8 per barrel lower than
1997. Equally important, oil prices were less than $15 per barrel for most of
1998, particularly during the second half of the year, making many drilling
programs economically infeasible. Natural gas prices within the U.S., although
significantly lower than 1997 levels, remained above $2 per million BTU until
the third quarter of 1998. During the third quarter of 1998, natural gas prices
began a decline which, combined with additional declines in crude oil prices,
resulted in further reductions in demand for hydrocarbon exploration and
9
development. These factors negatively impacted the industry and the Company.
Overall, the industry fundamentals in 1998 were significantly weaker than 1997.
Integrated business solutions, long term overseas contracts and
engineering and construction backlog benefited the Company's revenues throughout
1998 when compared to the industry fundamentals and worldwide rig counts.
Continued interest in deepwater drilling in the Gulf of Mexico and projects in
the North Sea, combined with U.S. natural gas prices above $2 per million BTU
benefited the industry during the first and second quarters of 1998. As industry
indicators began to significantly weaken in the third quarter of 1998, the
Company started implementing actions to properly align its resources to
projected industry conditions.
Although 1998 was a difficult year and 1999 will also be difficult, the
Company believes that long term industry fundamentals will prevail. Demand for
oil and natural gas worldwide should recover and grow. Over time, the
accelerating depletion of existing production and the need for technologies that
make exploration and production economically feasible in the presence of low oil
and gas prices will provide growth opportunities. The Company believes that its
customers will continue to seek opportunities to lower the overall cost of
exploring, developing and enhancing the recovery of hydrocarbons through
increased utilization of integrated solutions, application of new technology and
partnering and alliance arrangements. The Company believes that it has good
opportunities to expand its revenues and profit through greater participation in
larger projects that utilize its project management and integrated services
capabilities. However, uncertainty exists within the industry into the
foreseeable future.
Engineering and Construction Group. While the Company has seen projects
delayed and cancelled in many of the areas that it serves, the Company expects
to see demand for its engineering and construction services continue to increase
over the long term. The Company believes the key to increase its revenues and
improve profit margins in the current environment will be its ability to provide
total customer satisfaction. Today's competitive environment demands flexibility
and innovation. To bring more value to its customers, the Company must
demonstrate its ability to partner with other service and equipment suppliers
and customers on larger projects, accept more project success risk through total
project responsibility or fixed price contracts, broaden its core competencies,
acquire and fully utilize proprietary technology and manage costs. The Group has
determined it will focus on demand in the liquefied natural gas (LNG),
fertilizer, petroleum, chemical and forest products industries in the United
States and international locations. The Company also sees an expanding demand
for its government services capabilities in the United States and the United
Kingdom as governmental agencies, including local government units, continue to
expand their use of outsourcing to improve service levels and manage costs.
Dresser Equipment Group. Dresser Equipment Group's business activity is
primarily determined by activity levels within the energy industry. Products and
systems of Dresser Equipment Group include compressors, turbines, generators,
electric motors, pumps, engines and power systems, valves, instruments, meters
and pipe couplings, blowers and fuel dispensing systems. Demand for these
products is directly affected by global economic activity, which influences
demand for transportation fuels, petrochemicals, plastics, fertilizers,
chemicals and by-products of oil and gas. The conditions for sales of Dresser
Equipment Group products is highly competitive and its sales and earnings can be
affected by changes in competitive prices, fluctuations in the level of activity
in major industry areas, and general economic conditions. The group strives to
be the low cost provider in this competitive environment.
Because of the impact of economic and political conditions, and
uncertainty in many parts of the world, several initiatives are in place to
reduce capacity costs and improve operating performance. The Company believes
strong demand still exists for products and services of Dresser Equipment Group.
The key to achieving favorable operating results over the course of the year,
particularly in light of industry conditions, will rely to a great extent on the
ability of the group to leverage the customers currently served and leverage off
of the products and service offerings of other Halliburton companies to be able
to provide integrated solutions to the expanded customer base.
In the near term, activity levels remain uncertain. In the long term
the Company believes the demand for the products and systems of Dresser
Equipment Group will increase due to rising population and an expanding
industrial base.
10
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997 AND 1996
REVENUES
Millions of dollars 1998 1997 1996
- -------------------------------------------------------------------------------------
Energy Services Group $ 9,009.5 $ 8,504.7 $ 6,515.4
Engineering and Construction Group 5,494.8 4,992.8 4,720.7
Dresser Equipment Group 2,848.8 2,779.0 2,710.5
- -------------------------------------------------------------------------------------
Total revenues $ 17,353.1 $ 16,276.5 $ 13,946.6
- -------------------------------------------------------------------------------------
Revenues for 1998 were $17,353.1 million, an increase of 7% over 1997
revenues of $16,276.5 million and an increase of 24% over 1996 revenues of
$13,946.6 million. Approximately 65% of the Company's consolidated revenues were
derived from international activities in 1998 compared with 60% in 1997 and 59%
in 1996.
Energy Services Group revenues were $9,009.5 million for 1998, an
increase of 6% over 1997 revenues of $8,504.7 million and an increase of 38%
over 1996 revenues of $6,515.4 million. Revenues in the first half of 1998 were
higher than comparable periods of the prior two years. Revenues in the second
half of 1998 were impacted by the steep decline in activity as measured by the
worldwide average rotary rig count. The yearly average worldwide rotary rig
count fell 13% in 1998 compared to 1997 (including a third quarter comparative
decline of 21% and a fourth quarter comparative decline of 30%) as customers of
the Energy Services Group reacted to reduced prices for their products. Revenues
for pressure pumping activities in 1998 were lower than 1997 but increased
compared to 1996. The decrease in pressure pumping activities for 1998 compared
to 1997 occurred in the second half of 1998. Other product and service lines
experienced similar results in this time period. The revenue declines in 1998
compared to 1997 were more pronounced in North America, including the Gulf of
Mexico shelf, and Venezuela. Revenues from upstream oil and gas engineering
services increased in 1998 compared to 1997 and 1996, benefiting from activities
in subsea product lines and from large engineering projects. Revenues for
integrated exploration and production information systems reached record high
levels in 1998. Approximately 67% of the Energy Services Group's revenues were
derived from international activities each year in 1998, 1997 and 1996.
Engineering and Construction Group revenues were $5,494.8 million for
1998, an increase of 10% from 1997 revenues of $4,992.8 million and an increase
of 16% over 1996 revenues of $4,720.7 million. The increase in revenues in 1998
reflects LNG activities in Asia and Africa, an enhanced oil recovery project in
Africa, and a major ethylene project in Singapore as well as increased revenues
in Asia/Pacific from Kinhill, which was acquired in the third quarter of 1997.
See Note 14 to the annual consolidated financial statements for additional
information. For 1998 compared to 1997, revenues were negatively impacted by the
sale of the environmental services business in December 1997 and lower activity
levels for repair and refitting services for the British Royal Navy's fleet of
submarines and surface ships. For 1997 compared to 1996, revenues were aided by
the consolidation of Devonport Management Limited as a result of the Company's
increased ownership percentage in that subsidiary. See Note 14. Lower levels of
activity under service contracts with the U.S. Department of Defense to provide
technical and logistical support for military peacekeeping operations in Bosnia
resulted in revenue reductions of approximately $290.0 million in 1997 compared
to 1996.
Dresser Equipment Group revenues were $2,848.8 million in 1998, an
increase of 3% over 1997 revenues of $2,779.0 million, and an increase of 5%
over 1996 revenues of $2,710.5 million. The compression and pumping and flow
control product lines experienced small increases in revenues while the
measurement and power systems product lines reported a slight decline in
revenues for 1998 compared to 1997. Most of the increase in 1997 compared to
1996 came from the compressor joint venture with Ingersoll-Rand and the
measurement product lines.
11
OPERATING INCOME
Millions of dollars 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Energy Services Group $ 971.0 $ 1,019.4 $ 698.0
Engineering and Construction Group 237.2 219.0 134.0
Dresser Equipment Group 247.8 248.3 229.3
General corporate (79.4) (71.8) (72.3)
- --------------------------------------------------------------------------------------------------------
Operating income before special charges and credits $ 1,376.6 $ 1,414.9 $ 989.0
- --------------------------------------------------------------------------------------------------------
Special charges and credits:
Asset related $ (509.4) $ (9.7) $ (0.9)
Personnel reductions (234.7) (5.6) (41.0)
Facility consolidations (126.2) (34.0) (20.2)
Merger transaction costs (64.0) (8.6) (12.4)
Other costs and credits (45.8) 41.7 (11.3)
- --------------------------------------------------------------------------------------------------------
Total special charges and credits $ (980.1) $ (16.2) $ (85.8)
- --------------------------------------------------------------------------------------------------------
Operating income $ 396.5 $ 1,398.7 $ 903.2
- --------------------------------------------------------------------------------------------------------
Operating income was $396.5 million for 1998 compared to $1,398.7
million for 1997 and $903.2 million for 1996. Excluding special charges of
$980.1 million, $16.2 million and $85.8 million during 1998, 1997 and 1996,
respectively, operating income for 1998 decreased by 3% from 1997 and increased
by 39% over 1996 as shown in the preceding table. See Note 7 to the annual
consolidated financial statements for additional information on the special
charges and credits.
Energy Services Group operating income in 1998 was $971.0 million, a
decrease of 5% from 1997 operating income of $1,019.4 million and an increase of
39% over 1996 operating income of $698.0 million. Operating margins were 10.8%
in 1998 compared with 12.0% in 1997 and 10.7% in 1996. Most of the decline in
operating margins in 1998 compared to 1997 can be attributed to declines in the
completion products and pressure pumping lines, to lower activities in North
America and Venezuela, and to additional job loss provisions recorded in the
fourth quarter of 1998. Approximately 54%, 59% and 63% of the Energy Services
Group's operating income was derived from international activities for 1998,
1997 and 1996, respectively. Operating income for pressure pumping in 1998 was
about 10% lower than 1997 as activity levels were reduced in response to lower
oil and gas prices. Other product and service lines were also impacted by
reduced activity levels with only the drilling related lines having
significantly better operating results in 1998 over 1997. Operating income in
1997 for the group benefited from increased activity levels and increased prices
charged to customers, especially for pressure pumping services in North America.
Operating income for drilling fluids increased in 1997 over 1996 due to the
growth of more technically demanding wells being drilled, particularly in the
Gulf of Mexico. Operating income for upstream oil and gas engineering activities
in 1998 was about the same as 1997 results even after providing additional
provisions for project losses in the North Sea, North Africa and Latin America
related to variation orders for ongoing projects which the Company does not feel
will be accepted by the customer due to current industry conditions. Energy
Services Group results for 1996 include $35.0 million of gain sharing revenue on
its portion of the cost savings realized on the BP Andrew alliance. The alliance
completed the project seven months ahead of the scheduled production of oil and
achieved a $125.0 million savings compared with the targeted cost. Operating
income from pipecoating activities were substantially improved in 1997 compared
to 1996 due to higher activity levels in the Far East, Middle East and the
United States.
Engineering and Construction Group operating income for 1998 of $237.2
million increased 8% over 1997 and 77% over 1996. Operating margins were 4.3% in
1998 compared with 4.4% for 1997 and 2.8% for 1996. Operating income in 1998
includes a favorable settlement of a claim on a Middle Eastern construction
project. Excluding this settlement, operating margins for 1998 were 4.0%.
Operating income and margins in 1998 were negatively affected by losses in the
fourth quarter on existing highway and paving business and for selected projects
which were impacted by the economic downturn in Asia. The Engineering and
Construction Group has not started any new significant jobs in Asia. Improvement
12
in operating income in 1997 over 1996 was realized through overhead reductions,
a focus on higher margin business lines and the consolidation of Devonport
Management Limited as a result of the Company's increased ownership percentage
in that subsidiary. See Note 14 to the annual consolidated financial statements.
The 1997 operating income improvements over 1996 were aided by LNG activities
and oil recovery work in Africa together with engineering services for the
fertilizer industry in Latin America. Operating income in 1996 included a $17.1
million charge for the impairment of the Engineering and Construction Group's
investment in the Dulles Greenway toll road extension project.
Dresser Equipment Group operating income in 1998 was $247.8 million or
almost unchanged compared to 1997 operating income of $248.3 million. Operating
income for 1998 increased 8% over 1996 operating income of $229.3 million.
Operating income was negatively impacted in 1998 by $17 million of fourth
quarter merger related expenses. Operating income in 1998 for the compression
and pumping product line increased compared to 1997 due to restructuring
initiatives instituted in late 1997 and increased revenues. Operating income for
the flow control product line improved in 1998 over 1997 from cost improvements,
better product mix, and increased volume. Operating income for the measurement
product line decreased in 1998 due to weakness in the gas metering business as
gas utilities continued to work off their excess inventory. The power systems
product line operating income declined in 1998 compared to 1997 due to
customers' reduced capital spending caused by softer demand in the gas
compression and refining markets. Operating income increased in 1997 compared to
1996 primarily from the Ingersoll-Dresser Pump joint venture (profit improvement
initiatives started in prior years); Wayne fuel dispensing systems (introduction
of new technologies) and Energy Valve (improved margins and product mix).
General corporate expenses for 1998 were $79.4 million and include
expenses through the transition after the Merger for operating Dresser's
corporate offices as well as Halliburton's corporate offices. As a percent of
consolidated revenues, general corporate expenses were 0.5% in 1998 compared to
0.4% in 1997 and 0.5% in 1996.
NONOPERATING ITEMS
Interest expense was $136.8 million for 1998 compared to $111.3 million
in 1997 and $84.6 million in 1996. The increase in 1998 over 1997 is due to the
increased level of short-term borrowings outstanding during 1998. These
borrowings, which carry a lower interest rate than the Company's long-term debt,
were used for working capital, capital expenditures and acquisitions. The
increase in 1997 over 1996 is due to the issuance of debt under the Company's
medium-term note program in 1997 and a full year's interest on $300.0 million of
long-term debentures issued in August 1996 at a higher interest rate than the
previous short-term debt.
Interest income increased to $27.8 million in 1998 compared to $21.9
million in 1997 and $26.9 million in 1996. Interest income is typically a factor
of the levels of invested cash maintained by the Company and its subsidiaries.
Foreign currency gains (losses) netted to a loss of $12.4 million in
1998 compared to $0.7 million in 1997 and $19.1 million in 1996. The losses in
1998 occurred mainly in Asia/Pacific currencies. The 1996 losses were primarily
due to devaluations of the Venezuelan bolivar and costs of hedging foreign
exchange exposures of an Italian subsidiary.
Provision for income taxes was $244.4 million in 1998. The provision
for income taxes in 1998 includes a benefit of $234.1 million for special charge
items that are tax deductible. Nondeductible special charge items of $109.0
million include merger transaction costs and nondeductible goodwill which was
determined to be impaired. Excluding the special charge and applicable tax
benefits in 1998, the effective tax rate was 38.0%. The 1997 provision of $491.4
million was higher than the 1996 provision of $248.4 million due in part to
improved earnings. The effective income tax rate was 37.4% in 1997, compared
with 29.9% in 1996. The lower effective income tax rate and provision for 1996
are due to credits of $43.7 million recorded during the third quarter of 1996 to
recognize certain net operating loss carryforwards and the settlement of various
issues with the Internal Revenue Service. Excluding the tax benefits recorded in
1996, the effective income tax rate for 1996 was 35.2%. See Note 6 to the annual
consolidated financial statements.
Minority interest in net income of consolidated subsidiaries was $49.1
million in 1998 compared to $49.3 million in 1997 and $24.7 million in 1996. The
increase in 1997 over 1996 is due primarily to Dresser Equipment Group's
13
ownership interests in Dresser-Rand and the Engineering and Construction Group's
ownership interests in Devonport Management Limited, which increased from
approximately 30% to 51% during March 1997.
Net income (loss) for 1998 was a loss of $14.7 million for a $0.03
diluted loss per share. In 1997 net income of $772.4 million yielded $1.77
diluted income per share while 1996 net income of $557.9 million yielded $1.29
diluted income per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended 1998 with cash and equivalents of $202.6 million
compared with $384.1 million in 1997 and $446.0 million in 1996. To conform
Dresser's fiscal year-end to Halliburton's calendar year-end, Dresser's cash
flows are measured from December 31, 1997, rather than from the October 31, 1997
balances included on the consolidated balance sheets.
Cash flows from operating activities were $454.1 million for 1998
compared to $833.1 million for 1997 and $864.2 million for 1996. In 1998, the
primary use of cash for operating activities was to fund increased working
capital requirements.
Cash flows used in investing activities were $846.1 million for 1998,
$873.3 million for 1997 and $759.1 million for 1996. The majority of cash used
for investing activities during 1998 was for capital expenditures. Capital
expenditures in 1998 increased slightly over 1997 as the Company's continued
investment in its enterprise-wide information systems initiative offset declines
in other capital spending. Cash used in investing activities in 1997 also
includes the acquisitions of OGC of approximately $118.3 million, and Kinhill of
approximately $34.0 million, and an interest in PES (International) Limited of
approximately $33.6 million, offset by the sale of the Company's environmental
business for about $32.0 million. In 1996, investing activities included a $41.3
million expenditure for the Company's share of the purchase price of a
subsidiary acquired by the Company's former 36% owned affiliate, M-I L.L.C. Also
in 1996, several other acquisitions were made which used $32.2 million of cash.
Cash flows from financing activities provided $253.7 million in 1998
and used $20.6 million in 1997 and $148.4 million in 1996. The Company issued
$150.0 million of long-term debt under its medium-term note program in 1998.
Also in 1998, the Company had net borrowings of short-term debt of $369.3
million and proceeds from exercise of stock options of $49.1 million. Dividends
to shareholders used $254.2 million of cash in 1998. During 1997, cash was
provided by proceeds from debt issued under the Company's medium-term note
program of $300.0 million plus $3.2 million of other long-term borrowings and
proceeds from the exercise of stock options of $71.5 million. Offsetting these
inflows were payments on long-term debt of $17.7 million, net repayments on
short-term borrowings of $85.8 million, payments to reacquire common stock of
$44.1 million, and dividend payments of $250.3 million. Cash used for financing
activities during 1996 consisted primarily of dividend payments of $239.6
million and payments to reacquire common stock of $235.2 million offset by
proceeds from long-term borrowings of $295.6 million and proceeds from the
exercise of stock options of $42.6 million. The Company's combined short-term
notes payable and long-term debt was 32%, 24% and 23% of total capitalization at
the end of 1998, 1997 and 1996, respectively.
The Company has the ability to borrow additional short-term and
long-term funds if necessary. See Note 8 to the annual consolidated financial
statements regarding the Company's various short-term lines of credit, notes
payable and long-term debt.
FINANCIAL INSTRUMENT MARKET RISK
The Company is currently exposed to market risk from changes in foreign
currency exchange rates, and to a lesser extent, to changes in interest rates.
To mitigate market risk, the Company selectively hedges its foreign currency
exposure through the use of currency derivative instruments. The objective of
such hedging is to protect the Company's cash flows related to sales or
purchases of goods or services from fluctuations in currency rates. Inherent in
the use of derivative instruments are certain types of market risk: volatility
of the currency rates, time horizon of the derivative instruments, market cycles
and the type of derivative instruments used. The Company does not use derivative
instruments for trading purposes. See Note 1 to the annual consolidated
financial statements for additional information on the Company's accounting
policies on derivative instruments. See Note 15 to the annual consolidated
financial statements for additional disclosures related to derivative
instruments.
14
Foreign exchange. While the Company operates in over 120 countries, the
Company hedges only foreign currencies that are highly liquid and selects
derivative instruments or a combination of instruments whose fluctuation in
value is offset by the fluctuation in value to the underlying exposure. These
hedges generally have expiration dates that do not exceed two years. Exposures
to certain currencies are generally not hedged due primarily to the lack of
available markets or cost considerations (non-traded currencies). The Company
manages its foreign exchange hedging activities through a control system which
includes monitoring of cash balances in traded currencies, analytical techniques
such as value at risk estimations, and other procedures.
Interest rates. The Company currently has exposure to interest rate
risk from its long-term debt with interest based on LIBOR for the U.K. pound
sterling (GBP) plus 0.75% which was incurred in connection with its acquisition
of the Royal Dockyard in Plymouth, England (the Dockyard Loans). This risk is
partially offset by a compensating balance of approximately one-half of the
outstanding debt amount which earns interest at a rate equal to that of the
Dockyard Loans. The compensating balance is restricted as to use by the Company
and is included in other assets on the Company's consolidated balance sheets.
See Note 8 to the annual consolidated financial statements for additional
discussion of the Dockyard Loans.
Value at risk. The Company uses a statistical model to estimate the
potential loss related to derivative instruments used to hedge the market risk
of its foreign exchange exposure. The model utilizes historical price and
volatility patterns to estimate the change in value of the derivative
instruments which could occur from adverse movements in foreign exchange rates
for a specified time period at a specified confidence interval. The model is an
undiversified calculation based on the variance-covariance statistical modeling
technique and includes all foreign exchange derivative instruments outstanding
at December 31, 1998. The resulting value at risk of $2.8 million estimates,
with a 95% confidence interval, the potential loss the Company could incur in a
one-day period from foreign exchange derivative instruments due to adverse
foreign exchange rate changes.
Interest rate exposures. The following table represents principal
amounts at December 31, 1998, and related weighted average interest rates by
year of maturity for the Company's restricted cash and long-term debt
obligations. Other notes with varying interest rates of $10.2 million as shown
in Note 8 to the annual consolidated financial statements are excluded from the
following table.
Expected maturity date Fair
------------------------------------------------------------------
Millions of dollars 1999 2000 2001 2002 2003 Thereafter Total Value
- -----------------------------------------------------------------------------------------------------------------------
Assets:
Restricted cash - British
pound sterling 4.1 4.1 4.1 2.6 - - 14.9 14.9
Average variable rate 6.38% 6.17% 6.04% 5.93% - - 6.22%
Long-term debt:
U.S. dollar 50.0 300.0 - 75.0 138.6 825.0 1,388.6 1,538.0
Average fixed rate 6.27% 6.25% - 6.30% 8.0% 7.58% 7.56%
British pound sterling
(Dockyard Loans) 8.1 8.1 8.1 5.1 - - 29.4 29.4
Average variable rate 6.38% 6.17% 6.04% 5.93% - - 6.22%
- -----------------------------------------------------------------------------------------------------------------------
Weighted average variable rates are based on implied forward rates in
the yield curve at December 31, 1998. These implied forward rates should not be
viewed as predictions of actual future interest rates. Restricted cash and the
Dockyard Loans earn interest at LIBOR (GBP) plus 0.75%. Instruments that are
denominated in currencies other than the U.S. dollar reporting currency are
subject to foreign exchange rate risk as well as interest rate risk.
15
1998 SPECIAL CHARGES
The third quarter of 1998 financial results include a pretax charge of
$945.1 million ($722.0 million after tax) to provide for consolidation,
restructuring and merger related expenses related to the merger with Dresser and
the industry downturn. Components of the charge include $509.4 million of asset
related writeoffs, writedowns and charges; $204.7 million for personnel
reduction costs covering approximately 8,100 employees; $121.2 million of
facility consolidation charges; $64.0 million of merger transaction costs; and
$45.8 million of other costs. During the fourth quarter, an additional charge of
$35.0 million ($24.0 million after tax) was taken to provide $30.0 million for
additional personnel reduction costs covering approximately 2,750 employees and
$5.0 million for additional facility consolidations.
Approximately 45% of the special charge of $980.1 million either has
resulted or will result in cash outflows. During 1998, cash outflows of
approximately $110.0 million pertained to special charge items, primarily
severance and merger transaction costs, while the remainder will be incurred in
1999.
The Company expects to incur additional merger related incremental
costs of between $120.0 million and $130.0 million through the end of 1999 that
do not qualify as a special charge under the accounting rules. These costs
include the relocation of personnel, inventory and equipment as part of facility
consolidation efforts; implementing a company-wide common information technology
infrastructure; merging engineering work practices; harmonizing employee benefit
programs; and developing common policies and procedures to provide best
practices. Approximately $24.0 million of such costs were incurred during the
fourth quarter of 1998. During 1999, approximately $70.0 million will be
expensed during the first and second quarters. See Note 7 to the annual
consolidated financial statements for additional information on special charges
incurred in 1998.
ENVIRONMENTAL MATTERS
The Company is involved as a potentially responsible party in remedial
activities to clean up several "Superfund" sites under applicable federal law
which imposes joint and several liability, if the harm is indivisible, on
certain persons without regard to fault, the legality of the original disposal
or ownership of the site. Although it is very difficult to quantify the
potential impact of compliance with environmental protection laws, management of
the Company believes that any liability of the Company with respect to all but
one of such sites will not have a material adverse effect on the results of
operations of the Company. See Note 10 to the annual consolidated financial
statements for additional information on the one site.
YEAR 2000 ISSUE
The Year 2000 (Y2K) issue is the risk that systems, products and
equipment utilizing date-sensitive software or computer chips with two-digit
date fields will fail to properly recognize the Year 2000. Such failures by the
Company's software and hardware or that of government entities, service
providers, suppliers and customers could result in interruptions of the
Company's business which could have a material adverse impact on the Company.
In response to the Y2K issue, the Company has implemented an
enterprise-wide Year 2000 Program designed to identify, assess and address
significant Y2K issues in the Company's key business operations, including
products and services, suppliers, business and engineering applications,
information technology systems, facilities, infrastructure and joint venture
projects.
The Year 2000 Program is a comprehensive, integrated, multi-phase
process covering information technology systems and hardware as well as
equipment and products with embedded computer chip technology. The primary
phases of the program are: (1) inventorying existing equipment and systems; (2)
assessing equipment and systems to identify those which are not Y2K ready and to
prioritize critical items; (3) remediating, repairing or replacing non-Y2K ready
equipment and systems; (4) testing to verify Y2K readiness has been achieved;
and (5) deploying and certifying.
At the end of 1998, the Company completed its inventory and assessment
of all mission critical items. The Company estimates that it will complete the
majority of its remediation phase by the end of the third quarter of 1999.
16
In the fourth quarter of 1998, Landmark Graphics Corporation, a
wholly-owned subsidiary of the Company, released its Year 2000 tested version of
its integrated solutions software product.
Overall the Company estimates that it is approximately 50% complete
with its Year 2000 Program and anticipates having its products and
mission-critical systems and equipment Y2K ready during the third quarter of
1999. The balance of 1999 will be focused on deployment, certification, testing
and implementation of new and modified programs as required.
The Y2K issue is a pervasive problem for most companies due to the
interdependence of computer systems. Therefore, the Company is continually
assessing the risks surrounding this issue and its potential impact on the
Company. This includes the initial phases of business continuity planning,
audits by customers and meetings with its material customers and suppliers.
Meetings and presentations with key suppliers to date have not identified any
key suppliers who expect significant Y2K interruption of services or supplies to
the Company. Failure to address Y2K issues could result in business disruption
that could materially affect the Company's operations. In an effort to minimize
business interruptions, the Company is currently in the process of developing
contingency plans in the event circumstances prevent the Company from meeting
any portion of its current program schedule. These contingency plans are
expected to be completed by April 1999.
Through 1998, the Company has incurred approximately $22.0 million in
costs related to its Year 2000 Program. The Company estimates that prior to
January 1, 2000 it will have spent approximately $50.0 million to address the
Y2K issue. These estimates do not include the costs associated with the Company
initiatives discussed below. Costs associated with the Year 2000 Program are
being treated as period costs and expensed as incurred.
Independent of, but concurrent with, the Company's Y2K review, the
Company is installing an enterprise-wide business information system which is
scheduled to replace some of the Company's key finance, administrative and
marketing software systems by the end of 1999 and is Y2K ready. In addition, and
as a separate activity, the Company is in the process of replacing and
standardizing its desktop computing equipment and software and updating its
communications infrastructure. A third party is updating the communications
infrastructure. The replacement of desktop equipment and software is an internal
program based on the Company's common office environment initiative that has
been expanded to include Dresser. Both of these programs will be completed by
the end of 1999. All hardware and software installed as a part of these programs
are Y2K ready.
ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides
guidelines for companies to capitalize or expense costs incurred to develop or
obtain internal use software. The guidelines set forth in SOP 98-1 do not differ
significantly from the Company's current accounting policy for internal use
software and therefore the Company does not expect a material impact on its
results of operations or financial position from the adoption of SOP 98-1. The
Company adopted SOP 98-1 effective January 1, 1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5). SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. The Company adopted SOP 98-5
effective January 1, 1999 and expects to record expense of approximately $30
million pretax or $0.04 after-tax per diluted share from the adoption of SOP
98-5 as the cumulative effect of an accounting change. Estimated annual expense
for 1998 under SOP 98-5 would not have been materially different from the amount
expensed under the current accounting treatment.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities" (SFAS 133). This standard requires
entities to recognize all derivatives on the statement of financial position as
assets or liabilities and to measure the instruments at fair value. Accounting
for gains and losses from changes in those fair values are specified in the
standard depending on the intended use of the derivative and other criteria.
SFAS 133 is effective for the Company beginning January 1, 2000. The Company is
currently evaluating SFAS 133 to identify implementation and compliance methods
and has not yet determined the effect, if any, on its results of operations or
financial position.
17
FORWARD-LOOKING INFORMATION
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, Halliburton Company cautions that the statements
in this annual report and elsewhere, which are forward-looking and which provide
other than historical information, involve risks and uncertainties that may
impact Halliburton Company's actual results of operations. While such
forward-looking information reflects Halliburton Company's best judgement based
on current information, it involves a number of risks and uncertainties and
there can be no assurance that other factors will not affect the accuracy of
such forward-looking information. While it is not possible to identify all
factors, Halliburton Company continues to face many risks and uncertainties that
could cause actual results to differ from those forward-looking statements
including:
- litigation, including, for example, asbestosis litigation and
environmental litigation;
- unsettled political conditions, war, civil unrest, currency controls
and governmental actions in the numerous countries Halliburton
Company conducts operations;
- trade restrictions and economic embargoes imposed by the United
States and other countries;
- environmental laws, including those that require emission
performance standards for new and existing facilities;
- the magnitude of governmental spending for military and logistical
support of the type provided by Halliburton Company;
- operations in countries with significant amounts of political risk,
including, without limitation, Algeria and Nigeria;
- the effects of severe weather conditions on operations, including
for example, hurricanes shutting down operations on offshore
platforms;
- the impact of prolonged mild weather conditions on the demand for
and price of oil and natural gas;
- technological and structural changes in the industries served by
Halliburton Company;
- computer software and hardware and other equipment utilizing
computer technology used by governmental entities, service
providers, vendors, customers and Halliburton Company which may be
impacted by the Y2K issue;
- integration of acquired businesses, including Dresser and its
subsidiaries, into Halliburton Company;
- the risk inherent in the use of derivative instruments of the sort
used by Halliburton Company which could cause a change in value of
the derivative instruments as a result of adverse movements in
foreign exchange rates;
- changes in the price of oil and natural gas;
- changes in the price of commodity chemicals used by Halliburton
Company;
- changes in capital spending by customers in the hydrocarbon
industry for exploration, development, production, processing,
refining and pipeline delivery networks;
- increased competition in the hiring and retention of employees in
certain areas coupled with ongoing reductions-in-force in other
areas;
- changes in capital spending by customers in the wood pulp and paper
industries for plants and equipment;
- risks that result from entering into fixed fee engineering,
procurement and construction projects of the types provided by
Halliburton Company where failure to meet schedules, cost
estimates or performance targets could result in non-reimbursable
costs which cause the project not to meet expected profit margins;
and
- changes in capital spending by governments for infrastructure
projects of the sort provided by Halliburton Company.
In addition, future trends for pricing, margins, revenues and
profitability remain difficult to predict in the industries served by
Halliburton Company.
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Halliburton Company:
We have audited the accompanying consolidated balance sheets of
Halliburton Company (a Delaware corporation) and subsidiary companies as of
December 31, 1998 and 1997, and the related consolidated statements of income,
cash flows and shareholders' equity for each of the three years in the period
ended December 31, 1998. We did not audit the consolidated balance sheet of
Dresser Industries, Inc., a company acquired during 1998 in a transaction
accounted for as a pooling of interests, as of December 31, 1997, and the
related consolidated statements of income, cash flows and shareholders' equity
for each of the two years in the period ended December 31, 1997, as discussed in
Note 14. Such statements are included in the consolidated financial statements
of Halliburton Company and reflect total assets of 48% for the year ended
December 31, 1997, and total revenue of 46% and 47% for the years ended December
31, 1997 and 1996, respectively, of the related consolidated totals. These
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to amounts included for Dresser
Industries, Inc. is based solely upon the report of the other auditors. These
financial statements are the responsibility of Halliburton Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audits and the report of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Halliburton Company and subsidiary
companies as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
-------------------------------
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 25, 1999
19
RESPONSIBILITY FOR FINANCIAL REPORTING
Halliburton Company is responsible for the preparation and integrity of
its published financial statements. The financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
and, as such, include amounts based on judgments and estimates made by
management. The Company also prepared the other information included in the
annual report and is responsible for its accuracy and consistency with the
financial statements.
The financial statements have been audited by the independent
accounting firm, Arthur Andersen LLP, which was given unrestricted access to all
financial records and related data, including minutes of all meetings of
stockholders, the Board of Directors and committees of the Board.
The Company maintains a system of internal control over financial
reporting, which is intended to provide reasonable assurance to the Company's
management and Board of Directors regarding the preparation of financial
statements. The system includes a documented organizational structure and
division of responsibility, established policies and procedures, including a
code of conduct to foster a strong ethical climate which is communicated
throughout the Company, and the careful selection, training and development of
our people. Internal auditors monitor the operation of the internal control
system and report findings and recommendations to management and the Board of
Directors. Corrective actions are taken to address control deficiencies and
other opportunities for improving the system as they are identified. The Board,
operating through its Audit Committee, which is composed entirely of Directors
who are not current or former officers or employees of the Company, provides
oversight to the financial reporting process.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial statement
preparation. Furthermore, the effectiveness of an internal control system may
change over time.
The Company assessed its internal control system in relation to
criteria for effective internal control over financial reporting described in
"Internal Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based upon that assessment, the
Company believes that, as of December 31, 1998, its system of internal control
over financial reporting met those criteria.
HALLIBURTON COMPANY
by
/s/ Richard B. Cheney /s/ Gary V. Morris
- ----------------------------- -----------------------------
Richard B. Cheney Gary V. Morris
Chief Executive Officer Exeuctive Vice President and
Chief Financial Officer
20
HALLIBURTON COMPANY
Consolidated Statements of Income
(Millions of dollars except per share data)
Years ended December 31
------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Revenues:
Services $ 12,089.4 $ 11,256.3 $ 9,461.1
Sales 5,069.9 4,857.0 4,351.7
Equity in earnings of unconsolidated affiliates 193.8 163.2 133.8
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 17,353.1 $ 16,276.5 $ 13,946.6
- -----------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services $ 11,058.8 $ 10,163.9 $ 8,708.0
Cost of sales 4,317.6 4,032.7 3,628.3
General and administrative 600.1 665.0 621.3
Special charges and credits 980.1 16.2 85.8
- -----------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 16,956.6 14,877.8 13,043.4
- -----------------------------------------------------------------------------------------------------------------------------
Operating income 396.5 1,398.7 903.2
Interest expense (136.8) (111.3) (84.6)
Interest income 27.8 21.9 26.9
Foreign currency losses (12.4) (0.7) (19.1)
Other nonoperating income, net 3.7 4.5 4.6
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 278.8 1,313.1 831.0
Provision for income taxes (244.4) (491.4) (248.4)
Minority interest in net income of consolidated subsidiaries (49.1) (49.3) (24.7)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (14.7) $ $772.4 $ 557.9
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) per common share:
- -----------------------------------------------------------------------------------------------------------------------------
Basic $ (0.03) $ 1.79 $ 1.30
- -----------------------------------------------------------------------------------------------------------------------------
Diluted $ (0.03) $ 1.77 $ 1.29
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 438.8 431.1 429.2
Diluted 438.8 436.1 432.1
See notes to annual financial statements.
21
HALLIBURTON COMPANY
Consolidated Balance Sheets
(Millions of dollars and shares except per share data)
December 31
--------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 202.6 $ 384.1
Receivables:
Notes and accounts receivable (less allowance for bad debts of $76.6 and $58.6) 3,345.5 2,980.4
Unbilled work on uncompleted contracts 514.9 407.2
- --------------------------------------------------------------------------------------------------------------------
Total receivables 3,860.4 3,387.6
Inventories 1,301.8 1,299.2
Deferred income taxes, current 432.2 202.6
Other current assets 286.1 169.7
- --------------------------------------------------------------------------------------------------------------------
Total current assets 6,083.1 5,443.2
Property, plant and equipment:
At cost 6,850.1 6,646.0
Less accumulated depreciation 3,928.5 3,879.6
- --------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 2,921.6 2,766.4
Equity in and net advances to related companies 587.0 761.2
Excess of cost over net assets acquired (net of accumulated amortization
of $240.1 and $205.7) 770.2 1,024.6
Deferred income taxes, noncurrent 336.9 273.0
Other assets 413.2 433.4
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 11,112.0 $ 10,701.8
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable and current maturities of long-term debt $ 573.5 $ 57.9
Accounts payable 1,008.5 1,132.4
Accrued employee compensation and benefits 402.2 516.1
Advance billings on uncompleted contracts 513.3 638.3
Income taxes payable 245.6 335.2
Accrued special charges 426.4 13.1
Other current liabilities 834.2 767.3
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,003.7 3,460.3
Long-term debt 1,369.7 1,296.9
Employee compensation and benefits 1,006.6 1,013.7
Other liabilities 500.6 450.6
Minority interest in consolidated subsidiaries 170.2 163.4
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 7,050.8 6,384.9
- --------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, par value $2.50 per share - authorized 600.0 shares,
issued 445.9 and 453.7 shares 1,114.7 1,134.3
Paid-in capital in excess of par value 8.2 168.2
Deferred compensation (50.6) (44.3)
Accumulated other comprehensive income (148.8) (131.1)
Retained earnings 3,236.0 3,563.4
- --------------------------------------------------------------------------------------------------------------------
4,159.5 4,690.5
Less 5.9 and 15.8 shares treasury stock, at cost 98.3 373.6
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,061.2 4,316.9
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 11,112.0 $ 10,701.8
- --------------------------------------------------------------------------------------------------------------------
See notes to annual financial statements.
22
HALLIBURTON COMPANY
Consolidated Statements of Cash Flows
(Millions of dollars)
Years ended December 31
-----------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (14.7) $ 772.4 $ 557.9
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation and amortization 587.0 564.3 497.7
Provision (benefit) for deferred income taxes (293.4) 2.6 (13.4)
Distributions from (advances to) related companies, net of equity in
(earnings) or losses (22.5) (84.6) (57.2)
Accrued special charges 413.3 (44.6) 57.7
Other non-cash items 272.2 59.2 33.1
Other changes, net of non-cash items:
Receivables (279.9) (408.8) (363.5)
Inventories (66.3) (117.1) (147.5)
Accounts payable (45.3) (49.7) 98.8
Other working capital, net (142.5) 39.9 286.9
Other, net 46.2 99.5 (86.3)
- ----------------------------------------------------------------------------------------------------------------------------
Total cash flows from operating activities 454.1 833.1 864.2
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (914.3) (880.1) (731.1)
Sales of property, plant and equipment 100.0 180.6 64.4
Acquisitions of businesses, net of cash acquired (40.4) (161.5) (60.5)
Dispositions of businesses, net of cash disposed 7.7 37.6 21.6
Other investing activities 0.9 (49.9) (53.5)
- ----------------------------------------------------------------------------------------------------------------------------
Total cash flows from investing activities (846.1) (873.3) (759.1)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings of long-term debt 150.0 303.2 295.6
Payments on long-term debt (26.7) (17.7) (8.2)
Net borrowings (payments) of short-term debt 369.3 (85.8) (7.3)
Payments of dividends to shareholders (254.2) (250.3) (239.6)
Proceeds from exercises of stock options 49.1 71.5 42.6
Payments to reacquire common stock (19.9) (44.1) (235.2)
Other financing activities (13.9) 2.6 3.7
- ----------------------------------------------------------------------------------------------------------------------------
Total cash flows from financing activities 253.7 (20.6) (148.4)
- ----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (5.4) (1.1) 1.0
- ----------------------------------------------------------------------------------------------------------------------------
Decrease in cash and equivalents (143.7) (61.9) (42.3)
Cash and equivalents at beginning of year * 346.3 446.0 488.3
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 202.6 $ 384.1 $ 446.0
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information: Cash payments during the
period for:
Interest $ 137.0 $ 106.1 $ 76.1
Income taxes 534.8 307.4 191.1
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses $ 5.4 $ 337.1 $ 39.4
Liabilities disposed of in dispositions of businesses 23.6 205.5 9.8
* Cash balance at the beginning of 1998 does not agree to the prior year ending
cash balance in order to conform Dresser's fiscal year to Halliburton's calendar
year.
See notes to annual financial statements.
23
HALLIBURTON COMPANY
Consolidated Statements of Shareholders' Equity
(Millions of dollars and shares except per share data)
Years ended December 31
-----------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Common stock (number of shares)
Balance at beginning of year 453.7 221.7 221.3
Shares issued under incentive stock plans, net of forfeitures 1.1 1.3 0.3
Cancellation of treasury stock (8.9) - (0.1)
Shares issued in connection with acquisition - 8.2 -
Two-for-one common stock split - 222.5 -
Shares issued pursuant to stock warrant agreement - - 0.2
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year 445.9 453.7 221.7
- -----------------------------------------------------------------------------------------------------------------------
Common stock (dollars)
Balance at beginning of year $ 1,134.3 $ 554.3 $ 553.3
Shares issued under incentive stock plans, net of forfeitures 2.7 3.2 0.9
Cancellation of treasury stock (22.3) - (0.3)
Shares issued in connection with acquisition - 20.5 -
Two-for-one common stock split - 556.3 -
Shares issued pursuant to stock warrant agreement - - 0.4
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,114.7 $ 1,134.3 $ 554.3
- -----------------------------------------------------------------------------------------------------------------------
Paid-in capital in excess of par value
Balance at beginning of year $ 168.2 $ 615.1 $ 593.9
Shares issued under incentive stock plans, net of forfeitures 43.0 51.4 18.3
Cancellation of treasury stock (209.3) - (3.6)
Shares issued in connection with employee compensation plans 6.3 21.4 (1.0)
Shares issued in connection with acquisition - 36.6 -
Two-for-one common stock split - (556.3) -
Shares issued pursuant to stock warrant agreement - - 7.5
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 8.2 $ 168.2 $ 615.1
- -----------------------------------------------------------------------------------------------------------------------
Deferred compensation
Balance at beginning of year $ (44.3) $ (22.9) $ (23.9)
Current year awards, net (6.3) (21.4) 1.0
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (50.6) $ (44.3) $ (22.9)
- -----------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income
Cumulative translation adjustment $ (141.4) $ (127.2) $ (93.9)
Pension liability adjustment (7.4) (3.9) (6.9)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (148.8) $ (131.1) $ (100.8)
- -----------------------------------------------------------------------------------------------------------------------
Cumulative translation adjustment
Balance at beginning of year $ (127.2) $ (93.9) $ (104.7)
Conforming fiscal years (14.8) - -
Sale of M-I L.L.C. 9.4 - -
Current year changes, net of tax (8.8) (33.3) 10.8
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (141.4) $ (127.2) $ (93.9)
- -----------------------------------------------------------------------------------------------------------------------
See notes to annual financial statements.
24
HALLIBURTON COMPANY
Consolidated Statements of Shareholders' Equity
(continued)
(Millions of dollars and shares except per share data)
Years ended December 31
-----------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Pension liability adjustment
Balance at beginning of year $ (3.9) $ (6.9) $ (7.0)
Current year adjustment (3.5) 3.0 0.1
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (7.4) $ (3.9) $ (6.9)
- -----------------------------------------------------------------------------------------------------------------------
Retained earnings
Balance at beginning of year $ 3,563.4 $ 3,077.1 $ 2,758.8
Net income (loss) (14.7) 772.4 557.9
Cash dividends paid (254.2) (250.3) (239.6)
Cancellation of treasury stock (61.1) - -
Pooling of interests acquisition - (35.8) -
Conforming fiscal years 2.6 - -
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 3,236.0 $ 3,563.4 $ 3,077.1
- -----------------------------------------------------------------------------------------------------------------------
Treasury stock (number of shares)
Beginning of year 15.8 8.6 5.6
Shares issued under benefit, dividend reinvestment plan and
incentive stock plans, net (1.1) (1.5) (1.2)
Shares purchased 0.1 0.7 4.3
Cancellation of treasury stock (8.9) - (0.1)
Two-for-one common stock split - 8.0 -
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year 5.9 15.8 8.6
- -----------------------------------------------------------------------------------------------------------------------
Treasury stock (dollars)
Beginning of year $ 373.6 $ 381.4 $ 193.4
Shares issued under benefit, dividend reinvestment plan and
incentive stock plans, net (8.5) (51.9) (43.3)
Shares purchased 3.5 44.1 235.2
Cancellation of treasury stock (270.3) - (3.9)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 98.3 $ 373.6 $ 381.4
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income (loss) $ (14.7) $ 772.4 $ 557.9
Translation rate changes, net of tax (8.8) (33.3) 10.8
Current year adjustment to minimum pension liability (3.5) 3.0 0.1
- -----------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ (27.0) $ 742.1 $ 568.8
- -----------------------------------------------------------------------------------------------------------------------
See notes to annual financial statements.
25
HALLIBURTON COMPANY
Notes to Annual Financial Statements
Note 1. Significant Accounting Policies
The Company employs accounting policies that are in accordance with
generally accepted accounting principles in the United States. The preparation
of financial statements in conformity with generally accepted accounting
principles requires Company management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from those estimates.
Basis of presentation. On September 29, 1998, the Company completed the
acquisition of Dresser Industries, Inc. (Dresser) pursuant to the Agreement and
Plan of Merger (the Merger) dated as of February 25, 1998. The Merger was
accounted for using the pooling of interests method of accounting for business
combinations. Accordingly, the Company's financial statements have been restated
to include the accounts of Dresser for all periods presented. Prior to the
Merger, Dresser had a fiscal year-end of October 31. Beginning in 1998,
Dresser's fiscal year-end of October 31 has been conformed to Halliburton's
calendar year-end. Periods through December 31, 1997 contain Dresser's
information on a fiscal year-end basis combined with Halliburton's information
on a calendar year-end basis. Dresser's operating results for November and
December of 1997 are presented within the consolidated statements of
shareholders' equity as "conforming fiscal years."
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and all majority-owned subsidiaries. All
material intercompany accounts and transactions are eliminated. Investments in
other affiliated companies in which the Company has at least 20% ownership and
does not have management control are accounted for on the equity method. Certain
prior year amounts have been reclassified to conform with the current year
presentation.
Revenues and Income Recognition. The Company recognizes revenues as
services are rendered or products are shipped. The distinction between services
and product sales is based upon the overall activity of the particular business
operation. Revenues from engineering and construction contracts are reported on
the percentage of completion method of accounting using measurements of progress
towards completion appropriate for the work performed. All known or anticipated
losses on contracts are provided for currently. Post-contract customer support
agreements are recorded as deferred revenues and recognized as revenue ratably
over the contract periods of generally one year's duration. Training and
consulting service revenues are recognized as the services are performed.
Research and Development. Research and development expenses are charged
to income as incurred. Such charges were $308.1 million in 1998, $259.2 million
in 1997 and $218.0 million in 1996.
Software Development Costs. Costs of developing software for sale are
charged to expense when incurred, as research and development, until
technological feasibility has been established for the product. Thereafter,
software development costs are capitalized until the software is ready for
general release to customers. The Company capitalized costs of $13.4 million in
1998, $14.5 million in 1997 and $12.9 million in 1996 related to software
developed for resale. Amortization expense related to these costs was $17.5
million for 1998, $15.0 million for 1997 and $12.5 million for 1996. Once the
software is ready for release, amortization of the software development costs
begins. Capitalized software development costs are amortized over periods which
do not exceed three years.
Income Per Share. Basic income per share amounts are based on the
weighted average number of common shares outstanding during the year. Diluted
income per share includes additional common shares that would have been
outstanding if potential common shares with a dilutive effect had been issued.
See Note 11 for a reconciliation of basic and diluted income per share from
continuing operations. Prior year amounts have been adjusted for the two-for-one
common stock split declared on June 9, 1997, and effected in the form of a stock
dividend paid on July 21, 1997.
26
Cash Equivalents. The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Receivables. The Company's receivables are generally not
collateralized. Notes and accounts receivable at December 31, 1998 include $33.2
million ($30.8 million at December 31, 1997) due from customers in accordance
with applicable retainage provisions of engineering and construction contracts,
which will become billable upon future deliveries or completion of such
contracts. This amount is expected to be collected during 1999. Additionally,
other noncurrent assets include $7.1 million ($7.3 million at December 31, 1997)
of such retainage which is expected to be collected in years subsequent to 1999.
Unbilled work on uncompleted contracts generally represents work currently
billable and such work is usually billed during normal billing processes in the
next month. At December 31, 1998, notes of $295.9 million ($34.4 million at
December 31, 1997) with varying interest rates are included in notes and
accounts receivable. See Note 5 for information on the note receivable generated
by the sale of M-I L.L.C. (M-I).
Inventories. Inventories are stated at the lower of cost or market.
Cost represents invoice or production cost for new items and original cost less
allowance for condition for used material returned to stock. Production cost
includes material, labor and manufacturing overhead. The cost of most
inventories is determined using either the first-in, first-out (FIFO) method or
the average cost method although the cost of U.S. manufacturing and U.S. field
service inventories is determined using the last-in, first-out (LIFO) method.
Inventories of sales items owned by foreign subsidiaries and inventories of
operating supplies and parts are generally valued at average cost.
Property, Plant and Equipment. Property, plant and equipment is
reported at cost less accumulated depreciation, which is generally provided on
the straight-line method over the estimated useful lives of the assets. Certain
assets are depreciated on accelerated methods. Accelerated depreciation methods
are also used for tax purposes, wherever permitted. Expenditures for maintenance
and repairs are expensed; expenditures for renewals and improvements are
generally capitalized. Upon sale or retirement of an asset, the related costs
and accumulated depreciation are removed from the accounts and any gain or loss
is recognized. When events or changes in circumstances indicate that assets may
be impaired, an evaluation is performed comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value is
required. The Company follows the successful efforts method of accounting for
oil and gas properties. At December 31, 1998, there were no significant oil and
gas properties in the production stage of development. The Company is
implementing an enterprise-wide information system. External direct costs of
materials and services and payroll-related costs of employees working solely on
development of the software system portion of the project are capitalized.
Capitalized costs of the project will be amortized over periods of three to ten
years beginning when the system is placed in service. Training costs and costs
to reengineer business processes are expensed as incurred.
Excess of Cost Over Net Assets Acquired. The excess of cost over net
assets acquired is amortized on a straight-line basis over periods not exceeding
40 years. Excess of cost over net assets acquired that is identified with
impaired assets, if any, will be evaluated using undiscounted future cash flows
as the basis for determining if impairment exists. To the extent impairment is
indicated to exist, an impairment loss will be recognized based on fair value.
Income Taxes. A valuation allowance is provided for deferred tax assets
if it is more likely than not these items will either expire before the Company
is able to realize their benefit, or that future deductibility is uncertain.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been realized in the financial statements or
tax returns.
Derivative Instruments. The Company primarily enters into derivative
financial transactions to hedge existing or projected exposures to changing
foreign exchange rates and from time to time enters into derivatives to hedge
exposures to interest rates or commodity prices. The Company does not enter into
derivative transactions for speculative or trading purposes. Derivative
financial instruments to hedge exposure with an indeterminable maturity date are
generally carried at fair value with the resulting gains and losses reflected in
the results of operations. Gains or losses on hedges of identifiable commitments
are deferred and recognized when the offsetting gains or losses on the related
hedged items are recognized. Deferred gains or losses for hedges which are
terminated prior to the transaction date are recognized currently. In the event
27
an identifiable commitment is no longer expected to be realized, any deferred
gains or losses on hedges associated with the commitment are recognized
currently. Costs associated with entering into such contracts are presented in
other assets, while deferred gains or losses are included in other liabilities
or other assets, respectively, on the consolidated balance sheets. Recognized
gains or losses on derivatives entered into to manage foreign exchange risk are
included in foreign currency gains and losses on the consolidated statements of
income, while gains or losses on interest rate derivatives and commodity
derivatives are included in interest expense and operating income, respectively.
During the years ended December 31, 1998, 1997 and 1996, the Company did not
enter into any significant transactions to hedge interest rates or commodity
prices.
Foreign Currency Translation. Foreign entities whose functional
currency is the U.S. dollar translate monetary assets and liabilities at
year-end exchange rates and non-monetary items are translated at historical
rates. Income and expense accounts are translated at the average rates in effect
during the year, except for depreciation and cost of product sales which are
translated at historical rates. Gains or losses from changes in exchange rates
are recognized in consolidated income in the year of occurrence. Foreign
entities whose functional currency is the local currency translate net assets at
year-end rates and income and expense accounts at average exchange rates.
Adjustments resulting from these translations are reflected in the consolidated
statements of shareholders' equity titled "cumulative translation adjustment."
Note 2. Business Segment Information
The Company has three business segments. These segments are organized
around the products and services provided to the customers they serve. The
business units within each segment are evaluated on operating income, operating
margins and cash value added.
The Energy Services Group segment provides pressure pumping equipment
and services, logging and perforating, drilling systems and services, drilling
fluids systems, drill bits, specialized completion and production equipment and
services and well control. Also included in the Energy Services Group are
upstream oil and gas engineering, construction and maintenance services,
specialty pipe coating, insulation, underwater engineering services, integrated
exploration and production information systems and professional services to the
petroleum industry. The Energy Services Group has four business units:
Halliburton Energy Services, Brown & Root Energy Services, Landmark Graphics,
and Halliburton Energy Development. (In March 1999, Halliburton Energy
Development became a part of Halliburton Energy Services.) The long term
performance for these business units is linked to the long term demand for
hydrocarbons. The products and services the group provides are designed to help
discover, develop and produce hydrocarbons. The customers for this segment are
major oil companies, national oil companies and independent oil and gas
companies.
The Engineering and Construction Group segment provides engineering,
procurement, construction, project management, and facilities operation and
maintenance for hydrocarbon processing and other industrial and governmental
customers. The Engineering and Construction Group has two business units:
Kellogg-Brown & Root and Brown & Root Services. Both business units are engaged
in the delivery of engineering and construction services.
The Dresser Equipment Group segment designs, manufactures and markets
highly engineered products and systems for oil and gas producers, transporters,
processors, distributors and petroleum users throughout the world. Dresser
Equipment Group operates as one business unit.
The Company's equity in pretax income or losses of related companies is
included in revenues and operating income of the applicable segment.
Intersegment revenues included in the revenues of the other business segments
and sales between geographic areas are immaterial. General corporate assets not
included in a business segment are primarily comprised of receivables, deferred
tax assets, and certain other investments including the investment in the
Company's enterprise-wide information system.
The tables below represent the Company's adoption of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
28
Operations by Business Segment
Years ended December 31
-----------------------------------------
Millions of dollars 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
Revenues:
Energy Services Group $ 9,009.5 $ 8,504.7 $ 6,515.4
Engineering and Construction Group 5,494.8 4,992.8 4,720.7
Dresser Equipment Group 2,848.8 2,779.0 2,710.5
- -----------------------------------------------------------------------------------------------------
Total $ 17,353.1 $ 16,276.5 $ 13,946.6
- -----------------------------------------------------------------------------------------------------
Operating income:
Energy Services Group $ 971.0 $ 1,019.4 $ 698.0
Engineering and Construction Group 237.2 219.0 134.0
Dresser Equipment Group 247.8 248.3 229.3
Special charges and credits (980.1) (16.2) (85.8)
General corporate (79.4) (71.8) (72.3)
- -----------------------------------------------------------------------------------------------------
Total $ 396.5 $ 1,398.7 $ 903.2
- -----------------------------------------------------------------------------------------------------
Capital expenditures:
Energy Services Group $ 707.6 $ 682.9 $ 493.9
Engineering and Construction Group 33.5 61.5 105.6
Dresser Equipment Group 72.9 76.4 119.0
General corporate 100.3 59.3 12.6
- -----------------------------------------------------------------------------------------------------
Total $ 914.3 $ 880.1 $ 731.1
- -----------------------------------------------------------------------------------------------------
Depreciation and amortization:
Energy Services Group $ 405.4 $ 395.0 $ 338.5
Engineering and Construction Group 48.8 63.3 58.7
Dresser Equipment Group 86.8 98.6 92.8
General corporate 46.0 7.4 7.7
- -----------------------------------------------------------------------------------------------------
Total $ 587.0 $ 564.3 $ 497.7
- -----------------------------------------------------------------------------------------------------
Total assets:
Energy Services Group $ 6,618.1 $ 6,050.5 $ 4,999.2
Engineering and Construction Group 1,404.7 1,645.8 1,490.7
Dresser Equipment Group 1,944.2 2,115.3 2,126.8
General corporate 1,145.0 890.2 970.1
- -----------------------------------------------------------------------------------------------------
Total $ 11,112.0 $ 10,701.8 $ 9,586.8
- -----------------------------------------------------------------------------------------------------
Research and development:
Energy Services Group $ 220.0 $ 173.8 $ 150.1
Engineering and Construction Group 3.9 2.1 4.0
Dresser Equipment Group 84.2 83.3 63.9
- -----------------------------------------------------------------------------------------------------
Total $ 308.1 $ 259.2 $ 218.0
- -----------------------------------------------------------------------------------------------------
Special charges and credits:
Energy Services Group $ 721.1 $ (13.8) $ 43.1
Engineering and Construction Group 39.6 2.8 42.7
Dresser Equipment Group 21.1 27.2 -
General corporate 198.3 - -
- -----------------------------------------------------------------------------------------------------
Total $ 980.1 $ 16.2 $ 85.8
- -----------------------------------------------------------------------------------------------------
29
Operations by Geographic Area
Years ended December 31
------------------------------------------
Millions of dollars 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
Revenues:
United States $ 6,132.2 $ 6,506.5 $ 5,730.0
United Kingdom 2,246.7 2,315.0 1,504.6
Other areas (over 120 countries) 8,974.2 7,455.0 6,712.0
- ------------------------------------------------------------------------------------------------------
Total $ 17,353.1 $ 16,276.5 $ 13,946.6
- ------------------------------------------------------------------------------------------------------
Long-lived assets:
United States $ 2,433.4 $ 2,518.9 $ 2,432.9
United Kingdom 609.9 775.0 626.9
Other areas (numerous countries) 1,055.0 982.8 956.6
- ------------------------------------------------------------------------------------------------------
Total $ 4,098.3 $ 4,276.7 $ 4,016.4
- ------------------------------------------------------------------------------------------------------
Note 3. Inventories
Inventories at December 31, 1998 and 1997 are comprised of the
following:
Millions of dollars 1998 1997
- -----------------------------------------------------------------------------------------
Finished products and parts $ 638.3 $ 670.9
Raw materials and supplies 250.3 213.7
Work in process 561.4 535.8
Progress payments (148.2) (121.2)
- -----------------------------------------------------------------------------------------
Total $ 1,301.8 $ 1,299.2
- -----------------------------------------------------------------------------------------
Inventories on the last-in, first-out (LIFO) method were $167.9 million and
$195.9 million at December 31, 1998 and December 31, 1997, respectively. If the
average cost or FIFO methods had been in use for inventories on the LIFO basis,
total inventories would have been about $110.6 million and $100.8 million higher
than reported at December 31, 1998 and 1997, respectively.
Note 4. Property, Plant and Equipment
Property, plant and equipment at December 31, 1998 and 1997 is
comprised of the following:
Millions of dollars 1998 1997
- -----------------------------------------------------------------------------------------
Land $ 142.2 $ 136.0
Buildings and property improvements 1,131.6 1,055.9
Machinery, equipment and other 5,576.3 5,454.1
- -----------------------------------------------------------------------------------------
Total $ 6,850.1 $ 6,646.0
- -----------------------------------------------------------------------------------------
At December 31, 1998 and 1997, machinery, equipment and other property
includes oil and gas investments of approximately $223.7 million and $101.7
million, respectively and software developed for the Company's enterprise wide
information system of $132.7 million and $59.5 million, respectively.
Note 5. Related Companies
The Company conducts some of its operations through various joint
ventures which are in partnership, corporate and other business forms, which are
principally accounted for using the equity method.
30
The larger unconsolidated entities include European Marine Contractors,
Limited (EMC), Bredero-Shaw and Ingersoll-Dresser Pump (IDP). EMC which is 50%
owned by a subsidiary of the Company and part of the Energy Services Group,
specializes in engineering, procurement and construction of marine pipelines.
Bredero-Shaw, which is 50% owned by a subsidiary of the Company and part of the
Energy Services Group, specializes in pipe coating. Effective February 29, 1996,
a subsidiary of the Company entered into an agreement to form a joint venture
with Shaw Industries Ltd. (Shaw) by contributing its Bredero Price assets and
Shaw contributing its Shaw Pipe Protection assets on a worldwide basis. During
the fourth quarter of 1997, the Company and Shaw agreed to a long-term extension
of their strategic pipe coating alliance, Bredero-Shaw. In connection with the
new agreement, Shaw agreed to pay a subsidiary of the Company $50 million over a
four-year period. This transaction resulted in a fourth quarter pretax gain of
$41.7 million which is reported in the consolidated statements of income in the
caption "special charges and credits." For balance sheet purposes, at year-end
1997 the subsidiary of the Company deconsolidated Bredero-Shaw and accounted for
its 50% interest in the joint venture as an equity investment. The subsidiary of
the Company includes its share of equity earnings in the results of operations
beginning January 1, 1998 under the equity method. IDP which is 49% owned by a
subsidiary of the Company and part of the Dresser Equipment Group, manufactures
a broad range of pump products and services.
In the second quarter of 1996, M-I, formerly a 36% owned joint venture,
purchased Anchor Drilling Fluids. The Company's share of the purchase price was
$41.3 million and is included in cash flows from other investing activities. The
Company sold its 36% ownership interest in M-I to Smith International, Inc.
(Smith) on August 31, 1998. This transaction completed Halliburton's commitment
to the U.S. Department of Justice to sell its M-I interest in connection with
its merger with Dresser. The purchase price of $265 million was paid by Smith in
the form of a non-interest bearing promissory note due April 1999. This
receivable is included in "notes and accounts receivable" on the consolidated
balance sheets. All of M-I's debt remains an obligation of M-I.
Summarized financial statements for all combined jointly-owned
operations which are not consolidated are as follows:
Combined Operating Results
Millions of dollars 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Revenues $ 5,244.0 $ 3,958.9 $ 3,505.5
- ----------------------------------------------------------------------------------------------
Operating income $ 478.3 $ 407.3 $ 325.7
- ----------------------------------------------------------------------------------------------
Net income $ 341.0 $ 316.2 $ 236.3
- ----------------------------------------------------------------------------------------------
Combined Financial Position
Millions of dollars 1998 1997
- ---------------------------------------------------------------------------
Current assets $ 1,854.2 $ 1,779.5
Noncurrent assets 322.3 576.0
- ---------------------------------------------------------------------------
Total $ 2,176.5 $ 2,355.5
- ---------------------------------------------------------------------------
Current liabilities $ 1,074.6 $ 859.6
Noncurrent liabilities 118.2 245.3
Minority interests 3.9 8.1
Shareholders' equity 979.8 1,242.5
- ---------------------------------------------------------------------------
Total $ 2,176.5 $ 2,355.5
- ---------------------------------------------------------------------------
31
Note 6. Income Taxes
The components of the (provision) benefit for income taxes are:
Millions of dollars 1998 1997 1996
- ------------------------------------------------------------------------------------------------
Current income taxes
Federal $ (301.8) $ (167.2) $ (82.0)
Foreign (228.5) (306.1) (169.8)
State (7.5) (15.5) (10.0)
- ------------------------------------------------------------------------------------------------
Total (537.8) (488.8) (261.8)
- ------------------------------------------------------------------------------------------------
Deferred income taxes
Federal 291.8 5.4 61.2
Foreign and state 1.6 (8.0) (47.8)
- ------------------------------------------------------------------------------------------------
Total 293.4 (2.6) 13.4
- ------------------------------------------------------------------------------------------------
Total $ (244.4) $ (491.4) $ (248.4)
- ------------------------------------------------------------------------------------------------
Included in federal income taxes are foreign tax credits of $182.2
million in 1998, $154.0 million in 1997 and $109.2 million in 1996. The United
States and foreign components of income (loss) before income taxes and minority
interests are as follows:
Millions of dollars 1998 1997 1996
- ------------------------------------------------------------------------------------------------
United States $ (306.4) $ 736.8 $ 484.2
Foreign 585.2 576.3 346.8
- ------------------------------------------------------------------------------------------------
Total $ 278.8 $ 1,313.1 $ 831.0
- ------------------------------------------------------------------------------------------------
32
The primary components of the Company's deferred tax assets and
liabilities and the related valuation allowances are as follows:
Millions of dollars 1998 1997
- ----------------------------------------------------------------------------------
Gross deferred tax assets
Employee benefit plans $ 314.9 $ 334.4
Special charges 135.3 -
Accrued liabilities 93.5 79.4
Insurance accruals 74.8 71.5
Construction contract accounting methods 93.0 70.6
Inventory 59.8 37.4
Intercompany profit 38.5 39.3
Net operating loss carryforwards 38.5 46.7
Intangibles 30.5 -
Foreign tax credits - 21.2
Alternative minimum tax carryforward 15.1 15.1
All other 125.7 80.1
- ----------------------------------------------------------------------------------
Total 1,019.6 795.7
- ----------------------------------------------------------------------------------
Gross deferred tax liabilities
Depreciation and amortization 85.0 124.5
Unrepatriated foreign earnings 25.5 35.6
Safe harbor leases 10.4 11.0
All other 99.6 85.0
- ----------------------------------------------------------------------------------
Total 220.5 256.1
- ----------------------------------------------------------------------------------
Valuation allowances
Net operating loss carryforwards 26.3 30.7
All other 3.7 33.3
- ----------------------------------------------------------------------------------
Total 30.0 64.0
- ----------------------------------------------------------------------------------
Net deferred income tax asset $ 769.1 $ 475.6
- ----------------------------------------------------------------------------------
The Company has provided for the potential repatriation of certain
undistributed earnings of its foreign subsidiaries and considers earnings above
the amounts on which tax has been provided to be permanently reinvested. While
these additional earnings could become subject to additional tax if repatriated,
such a repatriation is not anticipated. Any additional amount of tax is not
practicable to estimate.
The Company has net operating loss carryforwards which expire as
follows: 1999 through 2003, $49.3 million; 2004 through 2008, $18.8 million;
2009 through 2010, $1.9 million. The Company also has net operating loss
carryforwards of $43.6 million with indefinite expiration dates. Reconciliations
between the actual provision for income taxes and that computed by applying the
U.S. statutory rate to income from continuing operations before income taxes and
minority interest are as follows:
33
Millions of dollars 1998 1997 1996
- ------------------------------------------------------------------------------------------------
Provision computed at statutory rate $ (97.6) $ (459.6) $ (290.9)
Reductions (increases) in taxes resulting from:
Tax differentials on foreign earnings (19.8) (4.3) 14.2
State income taxes, net of federal income tax benefit (7.8) (12.0) (7.0)
Net operating losses - - 22.7
Special charges (109.0) (3.0) (3.0)
Federal income tax settlement - - 16.1
Nondeductible goodwill (12.2) (12.5) (8.9)
Other items, net 2.0 - 8.4
- ------------------------------------------------------------------------------------------------
Total $ (244.4) $ (491.4) $ (248.4)
- ------------------------------------------------------------------------------------------------
The Company has received statutory notices of deficiency for the 1990
and 1991 tax years from the Internal Revenue Service (IRS) of $92.9 million and
$16.8 million, respectively, excluding any penalties or interest. The Company
believes it has meritorious defenses and does not expect that any liability
resulting from the 1990 or 1991 tax years will result in a material adverse
effect on its results of operations or financial position. In 1996, the Company
reached settlements with the IRS for certain matters including the 1989 taxable
year. As a result of the settlement for the 1989 taxable year, the Company
recognized tax benefits and net income was increased by $16.1 million in 1996.
Note 7. Special Charges and Credits
The Company has incurred various non-recurring transactions resulting
from acquisitions, profit initiatives, and industry downturns as summarized
below:
Asset Related Charges. Asset related charges include impairments and
write-offs of intangible assets and excess and/or duplicate machinery,
equipment, inventory and capitalized software. Charges also include write-offs
and lease cancellation costs related to acquired information technology
equipment replaced with the Company's standard common office equipment and exit
costs on other leased assets.
Personnel Charges. Personnel charges include severance and related
costs incurred to action announced employee reductions and personnel costs
related to change of control.
Facility Consolidation Charges. Facility consolidation charges include
costs to dispose of owned properties or exit leased facilities.
Merger Transaction Charges. Merger transaction costs include investment
banking, filing fees, legal and professional fees and other merger related
costs.
Other Charges. Other charges include eliminating duplicate agents,
contract cancellation costs and eliminating other duplicate capabilities.
34
Asset Facility Merger
Related Personnel Consolidation Transaction Other
Millions of dollars Charges Charges Charges Charges Charges Total
- -----------------------------------------------------------------------------------------------------------------------
1998 Charges to Expense
Business Segment
Energy Services Group $ 452.7 $ 156.7 $ 93.3 $ - $ 18.4 $ 721.1
Engineering & Construction Group 7.9 19.1 7.9 - 4.7 39.6
Dresser Equipment Group 18.1 1.4 1.6 - - 21.1
General corporate 30.7 57.5 23.4 64.0 22.7 198.3
- -----------------------------------------------------------------------------------------------------------------------
Total $ 509.4 $ 234.7 $ 126.2 $ 64.0 $ 45.8 $ 980.1
Utilized $ (442.3) $ (44.3) $ (3.4) $ (59.5) $ (4.2) $ (553.7)
- -----------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 $ 67.1 $ 190.4 $ 122.8 $ 4.5 $ 41.6 $ 426.4
- -----------------------------------------------------------------------------------------------------------------------
The third quarter of 1998 financial results include a pretax charge of
$945.1 million ($722.0 million after tax) to provide for costs associated with
the Merger and industry downturn due to declining oil and gas prices. During the
fourth quarter, an additional charge of $35.0 million ($24.0 million after tax)
was taken to provide $30.0 million for additional personnel reduction costs
covering approximately 2,750 employees within the Energy Services Group and $5.0
million for additional facility consolidations within the Energy Services Group.
As a result of the Merger, Halliburton and Dresser's completion
products operations and its formation evaluation businesses have been combined,
excluding Halliburton's logging-while-drilling (LWD) business and a portion of
its measurement-while-drilling business which were required to be disposed of in
connection with a Department of Justice consent decree. See Note 14. Based on
the change in strategic direction, the outlook for the industry, the decision to
standardize equipment product offerings and the expected loss on the disposition
of the LWD business, the Company recorded impairments based upon anticipated
future cash flows in accordance with FAS 121. This resulted in write-downs of
excess of cost over net assets acquired of $254.2 million related to directional
drilling and formation evaluation assets acquired in 1993 from Smith
International Inc., formation evaluation assets acquired in the 1988 acquisition
of Gearhart Industries, Inc., and completion products assets acquired in
conjunction with the acquisitions of Mono Pumps and AVA in 1990 and 1992,
respectively. In addition, $162.5 million of excess and duplicated machinery,
equipment and inventory related to formation evaluation and completion products
have been written down.
Additional asset related charges within the Energy Services Group
include excess and redundant equipment, software, inventory and excess of cost
over net assets acquired of $36.0 million related to other product lines which
are combinations of Halliburton and Dresser operations. The remaining asset
related charges include $26.0 million of write-downs of redundant or impaired
equipment, software and inventory in the Engineering and Construction and
Dresser Equipment Groups, plus $30.7 million for write-downs of information
technology equipment to be replaced with standard equipment and other duplicated
shared services assets applicable to all segments. The majority of the asset
related balance of $67.1 million at December 31, 1998 represents the write-downs
to fair value less disposal costs at the expected disposal date. The majority of
the balance will be utilized during the first and second quarters of 1999 in
connection with planned activities.
Personnel charges in 1998 reflect announced headcount reductions of
10,850 affecting all segments, corporate and shared service functions. In total,
approximately 75% of the reductions will occur within the Energy Services Group.
During 1998, the Company reduced employment levels, primarily operations
personnel by approximately 5,000 (approximately 3,000 within North America and
1,100 within Latin America), including 4,700 within the Energy Services Group.
The remainder will be incurred over the balance of 1999, primarily during the
first and second quarter of the year.
35
As a result of the Merger and the industry downturn, the Company plans
to vacate, sell or close over 400 service, manufacturing and administrative
facilities throughout the world. Until the properties included in the facility
consolidation charges are vacated, the Company plans to continue its normal
depreciation, lease costs and operating expenses which will be charged against
the Company's results of operations. The majority of these facilities are within
the Energy Services Group. During the fourth quarter of 1998, the Company sold
or returned 33 service and administrative facilities. As of December 31, 1998,
the Company had an additional 100 vacated properties which it is in the process
of selling, subleasing or returning to the owner.
Halliburton and Dresser merger transaction costs amounted to $64.0
million. At December 31, 1998, $4.5 million in estimated merger transaction
costs remain to be paid.
Other charges of $45.8 million include the estimated contract exit
costs associated with the elimination of duplicate agents and suppliers in
various countries throughout the world. These costs will occur during 1999 in
connection with the Company's renegotiation of these contractual agreements.
At December 31, 1998, no adjustments or reversals to the remaining
accrued special charges are planned.
In the third quarter of 1997, a subsidiary of the Company sold certain
assets of its SubSea operations to Global Industries, Inc. for $102.0 million
cash. The Company recognized a loss of $9.7 million ($6.3 million after tax) on
the sale. Also in the third quarter of 1997, the Company recorded merger
transaction charges of $8.6 million (also $8.6 million after tax) for costs
incurred by the Company and NUMAR to complete the NUMAR acquisition.
In the fourth quarter of 1997, the Company recorded several
nonrecurring transactions. The Company recognized a pretax charge of $21.6
million ($14.0 million after tax) to provide $9.6 million within the Energy
Services Group and $6.4 million within the Dresser Equipment Group for various
asset related charges whose carrying value has been impaired and $5.6 million
for early retirement incentives. A subsidiary of the Company, along with its
joint venture partner Ingersoll-Rand Company, approved profit initiatives at
Dresser-Rand Company and Ingersoll-Dresser Pump Company. The Company's share of
these initiatives included facility consolidation charges of $18.0 million ($7.5
million after tax and minority interest) for the closure of a Dresser-Rand
facility in Europe, consolidation of repair and service operations and the
discontinuance of certain product lines. A subsidiary of the Company and Shaw
Industries, Ltd. agreed to a long-term extension of their strategic pipe coating
alliance. See Note 5. This transaction resulted in a pretax gain of $41.7
million.
Additionally, the Company recorded its share of personnel reduction
charges of $30.2 million recorded during the two-month period ended December 31,
1997 to reduce employment levels by approximately 1,000 at Dresser-Rand and
Ingersoll-Dresser Pump. These costs have been recorded in the consolidated
statements of shareholders' equity as part of conforming the fiscal year of
Dresser to Halliburton's calendar year. See Note 1.
During the first quarter of 1996, Landmark recorded asset related
charges of $12.2 million ($8.7 million after tax) for the write-off of
in-process research and development activities acquired in connection with the
purchase by Landmark of certain assets and the assumption of certain liabilities
of Western Atlas International, Inc. and the write-off of related redundant
assets and activities.
During the third quarter of 1996, the Company recorded special charges
of $73.6 million ($50.3 million after tax), which included $41.0 million of
personnel charges to terminate approximately 1,000 employees related to
reorganization efforts within the Engineering and Construction Group and plans
to combine various administrative support functions throughout the Company into
shared services; $20.2 million of facility charges for restructuring certain
Engineering and Construction Group businesses, provide for excess lease space
and other items; and $12.4 million for merger transaction costs incurred in
relation to the merger with Landmark.
The special charges to net income in the third quarter of 1996 were
offset by tax credits during the same quarter of $43.7 million due to the
recognition of net operating loss carryforwards and the settlement during the
quarter of various issues with the Internal Revenue Service (IRS). The Company
reached agreement with the IRS and recognized net operating loss carryforwards
of $62.5 million ($22.5 million in tax benefits) from the 1989 tax year. The net
operating loss carryforwards were utilized in the 1996 tax year. In addition,
the Company also reached agreement with the IRS on issues related to
intercompany pricing of goods and services for the tax years 1989 through 1992
and entered into an advanced pricing agreement for the tax years 1993 through
1998. As a result of these agreements with the IRS, the Company recognized tax
36
benefits of $16.1 million. The Company also recognized net operating loss
carryforwards of $14.0 million ($5.1 million in tax benefits) in certain foreign
areas due to improving profitability and restructuring of foreign operations.
Note 8. Lines of Credit, Notes Payable and Long-Term Debt
Short-term notes payable and current maturities consists of:
Millions of dollars 1998 1997
- ------------------------------------------------------------------------------------
Short-term notes payable $ 515.0 $ 50.5
Current maturities of long-term debt 58.5 7.4
- ------------------------------------------------------------------------------------
Total $ 573.5 $ 57.9
- ------------------------------------------------------------------------------------
At year-end 1998, the Company had committed short-term lines of credit
totaling $550.0 million available and unused, and other short-term lines of
credit totaling $315.0 million. There were no borrowings outstanding under these
facilities. The remaining short-term debt consists primarily of $462.9 million
in commercial paper with an effective interest rate of 5.30% and $52.1 million
in foreign bank loans and overdraft facilities with varying rates of interest.
Long-term debt at the end of 1998 and 1997 consists of the following:
Millions of dollars 1998 1997
- ------------------------------------------------------------------------------------
6.25% notes due June 2000 $ 300.0 $ 300.0
7.6% debentures due August 2096 300.0 300.0
8.75% debentures due February 2021 200.0 200.0
8% senior notes due April 2003 138.6 149.5
Medium-term notes due 1999 through 2027 450.0 300.0
Term loans at LIBOR (GBP) plus 0.75% payable in
semi-annual installments through March 2002 29.4 45.9
Other notes with varying interest rates 10.2 8.9
- ------------------------------------------------------------------------------------
1,428.2 1,304.3
Less current portion 58.5 7.4
- ------------------------------------------------------------------------------------
Total long-term debt $ 1,369.7 $ 1,296.9
- ------------------------------------------------------------------------------------
The Company has issued notes under its medium-term note program as
follows:
Amount Issue Date Due Rate Prices Yield
-----------------------------------------------------------------------------------------------------------
$ 125 million 02/11/97 02/01/2027 6.75% 99.78% 6.78%
$ 50 million 05/12/97 05/12/2017 7.53% Par 7.53%
$ 50 million 07/08/97 07/08/1999 6.27% Par 6.27%
$ 75 million 08/05/97 08/05/2002 6.30% Par 6.30%
$ 150 million 11/24/98 12/01/2008 5.63% 99.97% 5.63%
-----------------------------------------------------------------------------------------------------------
The Company's 8.75% debentures due February 2021 do not have sinking
fund requirements and are not redeemable prior to maturity. The medium-term
notes may not be redeemed at the option of the Company prior to maturity. There
is no sinking fund applicable to the notes. Each holder of the 6.75% medium-term
notes has the right to require the Company to repay such holder's notes, in
whole or in part, on February 1, 2007. The net proceeds from the sale of the
notes were used for general corporate purposes.
During March 1997, a subsidiary of the Company incurred $56.3 million
of term loans in connection with the acquisition of the Royal Dockyard in
Plymouth, England (the Dockyard Loans). The Dockyard Loans are denominated in
37
GBP and bear interest at LIBOR (GBP) plus 0.75% payable in semi-annual
installments through March 2002. Pursuant to certain terms of the Dockyard
Loans, a subsidiary of the Company was initially required to provide a
compensating balance of $28.7 million which is restricted as to use by the
subsidiary. The compensating balance amount decreases in proportion to the
outstanding debt related to the Dockyard Loans and earns interest at a rate
equal to that of the Dockyard Loans. At December 31, 1998, the compensating
balance of $14.9 million is included in other assets in the consolidated balance
sheets.
Long-term debt matures over the next five years as follows: $58.5
million in 1999; $308.3 million in 2000; $8.3 million in 2001; $85.3 million in
2002; and $138.8 million in 2003.
Note 9. Dresser Financial Information
Dresser Industries Inc. has ceased filing periodic reports with the
Securities and Exchange Commission. Dresser's 8% senior notes (the Notes) remain
outstanding and the Notes are fully guaranteed by the Company. See Note 8. As
long as the Notes remain outstanding, summarized financial information of
Dresser will be presented in periodic reports filed by the Company on Form 10-K
and Form 10-Q. The Company has not presented separate financial statements and
other disclosures concerning Dresser because management has determined such
information is not material to holders of the Notes.
In January 1999, as part of the legal reorganization associated with
the Merger, Halliburton Delaware, Inc., a first tier holding company subsidiary,
was merged into Dresser Industries, Inc. As a result of this action, the
majority of the operating assets and activities of the combined company in 1999
will be included within the legal structure of Dresser Industries, Inc.
Dresser Industries, Inc.
Financial Position December 31 October 31
- -------------------------------------------------------------------------------------------------
Millions of dollars 1998 1997
- -------------------------------------------------------------------------------------------------
Current assets $ 2,417.2 $ 2,471.6
Noncurrent assets 2,613.7 2,627.2
- -------------------------------------------------------------------------------------------------
Total $ 5,030.9 $ 5,098.8
- -------------------------------------------------------------------------------------------------
Current liabilities $ 1,388.6 $ 1,687.4
Noncurrent liabilities 1,544.4 1,535.5
Minority interest 153.5 143.7
Shareholders' equity 1,944.4 1,732.2
- -------------------------------------------------------------------------------------------------
Total $ 5,030.9 $ 5,098.8
- -------------------------------------------------------------------------------------------------
Twelve months ended
Dresser Industries, Inc. -----------------------------------------------------------
Operating Results December 31 October 31 October 31
- ----------------------------------------------------------------------------------------------------------------------
Millions of dollars 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Revenues $ 8,135.7 $ 7,457.9 $ 6,561.5
- ----------------------------------------------------------------------------------------------------------------------
Operating income $ 677.1 $ 600.6 $ 485.3
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 343.8 $ 318.0 $ 257.5
- ----------------------------------------------------------------------------------------------------------------------
Note 10. Commitments and Contingencies
Leases. At year end 1998, the Company and its subsidiaries were
obligated under noncancelable operating leases, expiring on various dates
through 2021, principally for the use of land, offices, equipment, field
facilities, and warehouses. Aggregate rentals charged to operations for such
leases totaled $207.1 million in 1998, $202.8 million in 1997 and $177.8 million
in 1996. Future aggregate rentals on noncancelable operating leases are as
follows: 1999, $147.3 million; 2000, $121.0 million; 2001, $96.6 million; 2002,
$83.1 million; 2003, $60.9 million; and thereafter, $150.7 million.
38
Asbestosis Litigation. Since 1976, Dresser and its former divisions or
subsidiaries have been involved in litigation resulting from allegations that
third parties had sustained injuries and damage from the inhalation of asbestos
fibers contained in certain products manufactured by Dresser and its former
divisions or subsidiaries or companies acquired by Dresser.
Over the last 20 years approximately 183,000 claims have been filed
against Dresser and its former divisions or subsidiaries. Claims continue to be
filed with 29,400 new claims filed in 1998. Dresser and its former divisions or
subsidiaries have entered into agreements with insurance carriers which cover,
in whole or in part, indemnity payments, legal fees and expenses for certain
categories of claims. Dresser and its former divisions or subsidiaries are in
negotiation with carriers over coverage for the remaining categories of claims.
Because these agreements are governed by exposure dates, payment type and the
product involved, the covered amount varies by individual claim. In addition,
lawsuits are pending against several carriers seeking to recover additional
amounts related to these claims.
Since 1976, Dresser and its former divisions and subsidiaries have
settled or disposed of 120,000 claims for a gross cost of approximately $89.1
million with insurance carriers paying all but $37.0 million. Provision has been
made for the estimated exposure, based on historical experience and expected
recoveries from insurance carriers, related to the 63,400 claims which were open
at the end of 1998 including 14,000 for which settlements are pending.
Management has no reason to believe that the insurance carriers will not be able
to meet their share of future obligations under the agreements.
Pursuant to an agreement entered into at the time of the spin-off,
Global Industrial Technologies, Inc. ("Global" formerly INDRESCO, Inc.) assumed
liability for asbestos related claims filed against Dresser after July 31, 1992
relating to refractory products manufactured or marketed by the Harbison-Walker
Refractories Division of Dresser Industries, Inc. These asbestos claims are
subject to certain agreements with insurance carriers that cover expense and
indemnity payments. Global now disputes that it assumed responsibility for any
of such asbestos claims based on negligence. Global also now asserts certain
other claims relating to the insurance coverage responding to asbestos claims.
In order to resolve these assertions, Global has invoked the dispute resolution
provisions of the 1992 agreement, which require binding arbitration. On February
19, 1999 Dresser filed suit in the Delaware Chancery Court seeking an injunction
to restrain such arbitration as being barred by the Delaware statute of
limitations. The Company believes that these new assertions by Global are
without merit and intends to vigorously defend itself against them.
Management recognizes the uncertainties of litigation and the
possibility that a series of adverse rulings could materially impact operating
results. However, based upon Dresser's historical experience with similar
claims, the time elapsed since Dresser and its former divisions or subsidiaries
discontinued sale of products containing asbestos, and management's
understanding of the facts and circumstances that gave rise to such claims,
management believes that the pending asbestos claims will be resolved without
material effect on Halliburton's financial position or results of operations.
Environmental. The Company is involved through its subsidiaries as a
potential responsible party (PRP) in remedial activities to clean up various
"Superfund" sites under applicable federal law which imposes joint and several
liability, if the harm is indivisible, on certain persons without regard to
fault, the legality of the original disposal, or ownership of the site. Although
it is very difficult to quantify the potential impact of compliance with
environmental protection laws, management of the Company believes that any
liability of the Company with respect to all but one of such sites will not have
a material adverse effect on the results of operations of the Company.
With respect to a site in Jasper County, Missouri (Jasper County
Superfund Site), sufficient information that would enable management to quantify
the Company's potential liability has not been developed and management believes
the process of determining the nature and extent of remediation at this site and
the total costs thereof will be lengthy. Brown & Root, Inc., now Kellogg Brown &
Root, Inc. (KBR), a subsidiary of the Company, has been named as a PRP with
respect to the Jasper County Superfund Site by the Environmental Protection
Agency (EPA). The Jasper County Superfund Site includes areas of mining activity
that occurred from the 1800s through the mid 1950s in the southwestern portion
of Missouri. The site contains lead and zinc mine tailings produced from mining
activities. KBR is one of nine participating PRPs that have agreed to perform a
Remedial Investigation/Feasibility Study (RI/FS), which, due to various delays,
is not expected to be completed until late 1999. Although the entire Jasper
39
County Superfund Site comprises 237 square miles as listed on the National
Priorities List, in the RI/FS scope of work, the EPA has only identified seven
areas, or subsites, within this area that need to be studied and then possibly
remediated by the PRPs. Additionally, the Administrative Order on Consent for
the RI/FS only requires KBR to perform RI/FS work at one of the subsites within
the site, the Neck/Alba subsite, which only comprises 3.95 square miles. KBR's
share of the cost of such a study is not expected to be material. In addition to
the Superfund issues, the State of Missouri has indicated that it may pursue
natural resource damage claims against the PRPs. At the present time KBR cannot
determine the extent of its liability, if any, for remediation costs or natural
resource damages on any reasonably practicable basis.
General Litigation. The purchasers of Dresser's former hand tool
division sued Dresser for fraud in connection with the October 1983 transaction.
In May 1994, the jury returned a verdict awarding the plaintiffs $4.0 million in
compensatory damages and $50.0 million in punitive damages. On October 13, 1994,
the Court ordered a reduction of damages from $54.0 to $12.0 million. On October
15, 1996, the Court of Appeals issued its decision reversing the trial court's
decision as to compensatory and punitive damages and remanding the case for a
new trial on damages. On remand, the trial court ordered that the new trial
contemplated by the appellate decision be limited to compensatory damages only,
despite the express statement that punitive damages were also reversed, and
decided that the court would review the original punitive damages verdict after
the retrial on compensatory damages.
As of October, 1998 the trial was held on compensatory damages and
concluded with a jury award of $1. Following that, a hearing was held in
January, at which the judge reduced the punitive damage award from $50 million
to $650,000. The sum of $650,001 was paid during the first week of February
1999, and this case is now concluded.
Merger. In connection with the Merger, Dresser and its directors have
been named as defendants in three lawsuits filed in late February of 1998 and
early March of 1998 in the Delaware Court of Chancery. The lawsuits each purport
to be a class action filed on behalf of Dresser's stockholders and allege that
the consideration to be paid to Dresser's stockholders in the Merger is
inadequate and does not reflect the true value of Dresser. The complaints also
each allege that the directors of Dresser have breached their fiduciary duties
in approving the Merger. One of the actions further alleges self-dealing on the
part of the individual defendants and asserts that the directors are obliged to
conduct an auction to assure that stockholders receive the maximum realizable
value for their shares. All three actions seek preliminary and permanent
injunctive relief as well as damages. On June 10, 1998 the court issued an order
consolidating the three lawsuits which requires the plaintiffs to file an
amended consolidated complaint "as soon as practicable." To date, plaintiffs
have not filed an amended complaint. The Company believes that the lawsuits are
without merit and intends to defend the lawsuits vigorously.
Other. The Company and its subsidiaries are parties to various other
legal proceedings. Although the ultimate dispositions of such proceedings are
not presently determinable, in the opinion of the Company any liability that may
ensue will not be material in relation to the consolidated financial position
and results of operations of the Company.
40
Note 11. Income Per Share
Millions of dollars and shares
except per share data 1998 1997 1996
- ----------------------------------------------------------------------------------------
Net income (loss) $ (14.7) $ 772.4 $ 557.9
- -----------------------------------------------------------------------------------------
Basic weighted average shares 438.8 431.1 429.2
Effect of common stock equivalents - 5.0 2.9
- -----------------------------------------------------------------------------------------
Diluted weighted average shares 438.8 436.1 432.1
- -----------------------------------------------------------------------------------------
Income (loss) per common share:
Basic $ (0.03) $ 1.79 $ 1.30
- -----------------------------------------------------------------------------------------
Diluted $ (0.03) $ 1.77 $ 1.29
- -----------------------------------------------------------------------------------------
Basic income per share amounts are based on the weighted average number
of common shares outstanding during the period. Diluted income per share
includes additional common shares that would have been outstanding if potential
common shares with a dilutive effect had been issued. Diluted earnings per share
for 1998 excludes 3.3 million potential common shares which were antidilutive
for earnings per share purposes. Also excluded from the computation of diluted
earnings per share are options to purchase 1.4 million shares of common stock in
1998; 1.1 million shares in 1997; and 2.6 million shares in 1996. These options
were outstanding during these respective years, but were excluded because the
option exercise price was greater than the average market price of the common
shares.
Note 12. Common Stock
On June 25, 1998, the Company's shareholders voted to increase the
Company's number of authorized shares from 400.0 million to 600.0 million.
On May 20, 1997, the Company's shareholders voted to increase the
Company's number of authorized shares from 200.0 million shares to 400.0 million
shares. On June 9, 1997, the Company's Board of Directors approved a two-for-one
stock split effected in the form of a stock dividend distributed on July 21,
1997 to shareholders of record on June 26, 1997. The par value of the Company's
common stock of $2.50 per share remained unchanged. As a result of the stock
split, $556.3 million was transferred from paid-in capital in excess of par
value to common stock. Historical share and per share amounts presented on the
supplemental consolidated statements of income and in the discussion below
concerning stock options and restricted stock have been restated to reflect the
stock split.
The Company's 1993 Stock and Long-Term Incentive Plan (1993 Plan)
provides for the grant of any or all of the following types of awards: (1) stock
options, including incentive stock options and non-qualified stock options; (2)
stock appreciation rights, in tandem with stock options or freestanding; (3)
restricted stock; (4) performance share awards; and (5) stock value equivalent
awards. Under the terms of the 1993 Plan as amended, 27 million shares of the
Company's Common Stock have been reserved for issuance to key employees. At
December 31, 1998, 14.6 million shares were available for future grants under
the 1993 Plan.
In connection with the acquisitions of Dresser, Landmark Graphics
Corporation (Landmark) and NUMAR Corporation (NUMAR) (see Note 14), outstanding
stock options under the stock option plans maintained by Dresser, Landmark and
NUMAR were assumed by the Company. Stock option transactions summarized below
include amounts for the 1993 Plan, the Dresser plans using the acquisition
exchange rate of 1 share for each Dresser share, the Landmark plans using the
acquisition exchange rate of 1.148 shares for each Landmark share, and the NUMAR
plans using the acquisition exchange rate of .9664 shares for each NUMAR share.
The period from December 1997 to December 1998 includes Dresser's activities
from its fiscal year-end of October 1997 to December 1997 in order to conform
Dresser's fiscal year-end to Halliburton's calendar year-end.
41
Exercise Weighted Average
Number of Price per Exercise Price
Stock Options Shares Share per Share
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 12,289,650 $ 2.90 - 29.73 $ 18.53
- ---------------------------------------------------------------------------------------------------
Granted 4,295,409 14.48 - 29.57 27.49
Exercised (2,722,828) 2.90 - 23.88 16.72
Forfeited (445,660) 8.71 - 28.09 18.81
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 13,416,571 3.49 - 29.73 21.77
- ---------------------------------------------------------------------------------------------------
Options assumed in acquisition 854,050 3.10 - 22.12 12.22
Granted 2,194,972 30.69 - 61.50 46.18
Exercised (3,684,923) 3.10 - 29.56 17.95
Forfeited (395,833) 9.15 - 39.88 22.69
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 12,384,837 3.10 - 61.50 26.55
- ---------------------------------------------------------------------------------------------------
Granted 4,273,368 26.19 - 46.50 33.07
Exercised (2,435,393) 3.10 - 37.88 20.84
Forfeited (397,610) 5.40 - 54.50 33.64
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 13,825,202 $ 3.10 - 61.50 $ 29.37
- ---------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1998 are composed of the following:
Outstanding Exercisable
------------------------------------------------ --------------------------------
Weighted
Number of Average Weighted Number of Weighted
Shares at Remaining Average Shares at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1998 Life Price 1998 Price
- -----------------------------------------------------------------------------------------------------------
$ 3.10 - 14.38 354,189 3.81 $ 10.36 354,189 $ 10.36
14.48 - 18.13 1,806,304 6.12 16.68 1,660,940 16.71
18.24 - 29.19 5,519,919 7.88 25.28 2,943,534 23.11
29.56 - 61.50 6,144,790 8.30 37.87 2,885,151 35.46
- -----------------------------------------------------------------------------------------------------------
$ 3.10 - 61.50 13,825,202 7.73 $ 29.37 7,843,814 $ 25.72
- -----------------------------------------------------------------------------------------------------------
There were 6.9 million options exercisable with a weighted average
exercise price of $21.17 at December 31, 1997, and 6.5 million options
exercisable with a weighted average exercise price of $18.57 at December 31,
1996.
All stock options under the 1993 Plan, including options granted to
employees of Dresser, Landmark and NUMAR since the acquisition of such
companies, are granted at the fair market value of the Common Stock at the grant
date. Landmark, prior to its acquisition by the Company, had provisions in its
plans that allowed Landmark to set option exercise prices at a defined
percentage below fair market value.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. The weighted average assumptions and
resulting fair values of options granted are as follows:
42
Assumptions Weighted Average
---------------------------------------------------------------------
Risk-Free Expected Expected Expected Fair Value of
Interest Rate Dividend Yield Life (in years) Volatility Options Granted
- --------------------------------------------------------------------------------------------------------------
1998 4.3 - 5.3% 1.2 - 2.7% 5 - 6.5 20.1 - 38.0% $ 11.63
1997 6.0 - 6.4% 1.0 - 2.7% 5 - 6.5 22.8 - 43.3% $ 17.29
1996 5.8 - 5.9% 1.6 - 2.7% 5 - 6.5 23.1 - 39.7% $ 9.44
- --------------------------------------------------------------------------------------------------------------
Stock options generally expire ten years from the grant date. Stock
options vest over a three-year period, with one-third of the shares becoming
exercisable on each of the first, second and third anniversaries of the grant
date.
The Company accounts for its option plans in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. Had compensation cost for the Company's
stock option programs been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), the Company's pro forma net income (loss) for 1998, 1997 and 1996 would
have been $(42.6) million, $750.3 million and $547.1 million, respectively,
resulting in diluted earnings (loss) per share of $(0.10), $1.72 and $1.27,
respectively.
Restricted shares awarded under the 1993 Plan for 1998, 1997 and 1996
were 414,510; 515,650; and 363,800, respectively. The shares awarded are net of
forfeitures of 136,540; 34,900; and 34,600 shares in 1998, 1997 and 1996,
respectively. The weighted average fair market value per share at the date of
grant of shares granted in 1998, 1997 and 1996 was $34.77, $45.29 and $28.24,
respectively.
The Company's Restricted Stock Plan for Non-Employee Directors
(Restricted Stock Plan) allows for each non-employee director to receive an
annual award of 400 restricted shares of Common Stock as a part of compensation.
The Company reserved 100,000 shares of Common Stock for issuance to non-employee
directors. The Company issued 3,200; 3,200 and 3,600 restricted shares in 1998,
1997 and 1996, respectively, under this plan. At December 31, 1998, 20,400
shares have been issued to non-employee directors under this plan. The weighted
average fair market value per share at the date of grant of shares granted in
1998, 1997 and 1996 was $36.31, $46.06 and $26.57, respectively.
The Company's Employees' Restricted Stock Plan was established for
employees who are not officers, for which 200,000 shares of Common Stock have
been reserved. At December 31, 1998, 170,300 shares (net of 26,700 shares
forfeited) have been issued. Forfeitures were 1,900; 14,600 and 8,400 in 1998,
1997 and 1996, respectively, and no further grants are being made under this
plan.
Under the terms of the Company's Career Executive Incentive Stock Plan,
15 million shares of the Company's Common Stock were reserved for issuance to
officers and key employees at a purchase price not to exceed par value of $2.50
per share. At December 31, 1998, 11.7 million shares (net of 2.2 million shares
forfeited) have been issued under the plan. No further grants will be made under
the Career Executive Incentive Stock Plan.
Restricted shares issued under the 1993 Plan, Restricted Stock Plan,
Employees' Restricted Stock Plan and the Career Executive Incentive Stock Plan
are limited as to sale or disposition with such restrictions lapsing
periodically over an extended period of time not exceeding ten years. The fair
market value of the stock, on the date of issuance, is being amortized and
charged to income (with similar credits to paid-in capital in excess of par
value) generally over the average period during which the restrictions lapse.
Compensation costs recognized in income for 1998, 1997 and 1996 were $7.6
million, $7.1 million and $6.9 million, respectively. At December 31, 1998, the
unamortized amount is $50.6 million.
Note 13. Series A Junior Participating Preferred Stock
The Company has previously declared a dividend of one preferred stock
purchase right (a Right) on each outstanding share of Common Stock. This
dividend is also applicable to each share of Halliburton Common Stock that was
issued subsequent to adoption of the Rights Agreement entered into with
ChaseMellon Shareholder Services, L.L.C. (the Rights Agent). Each Right entitles
its holder to buy one two-hundredth of a share of the Company's Series A Junior
43
Participating Preferred Stock, without par value, at an exercise price of $75.
These Rights are subject to certain antidilution adjustments, which have been
set out in the Rights Agreement entered into with the Rights Agent. The Rights
do not have any voting rights and are not entitled to dividends.
The Rights become exercisable in certain limited circumstances
involving a potential business combination. After the Rights become exercisable,
each Right will entitle its holder to an amount of Common Stock of the Company,
or in certain circumstances, securities of the acquirer, having in the
aggregate, a market value equal to two times the exercise price of the Right.
The Rights are redeemable at the Company's option at any time before they become
exercisable. The Rights expire on December 15, 2005. No event during 1998 made
the Rights exercisable.
Note 14. Acquisitions and Dispositions
Dresser Merger. On September 29, 1998 the Company completed the
acquisition of Dresser Industries, Inc. (the Merger), by converting the
outstanding Dresser common stock into an aggregate of approximately 176 million
shares of Common Stock of the Company. The Company has also reserved
approximately 7.3 million shares of common stock for outstanding Dresser stock
options and other employee and directors plans. The Merger qualified as a
tax-free exchange to Dresser's shareholders for U.S. federal income tax purposes
and was accounted for using the pooling of interests method of accounting for
business combinations. Accordingly, the Company's financial statements have been
restated to include the results of Dresser for all periods presented. Beginning
in 1998, Dresser's year-end of October 31 has been conformed to Halliburton's
calendar year-end. Periods through December 1997 contain Dresser's information
on a fiscal year-end basis combined with Halliburton's information on a calendar
year-end basis. For the two months ended December 31, 1997, Dresser had revenues
of $1,110.2 million, operating income of $53.2 million, and net income of $35.8
million. Operating income for the two-month period includes a pretax special
charge of $30.2 million ($12.0 million after tax and minority interest) related
to Dresser's share of profit improvement initiatives at the Dresser-Rand and
Ingersoll-Dresser Pump joint ventures.
Results for the two-month period have been included in retained
earnings, and dividends of $33.2 million paid in December 1997 have been
deducted from retained earnings in the consolidated statements of shareholders'
equity at December 31, 1998 as conforming fiscal years. The change to Dresser's
cumulative translation adjustment account for the period between October 31,
1997 and December 31, 1997 of $14.8 million is also included in the consolidated
statements of shareholders' equity as conforming fiscal years. There were no
material transactions between Halliburton and Dresser prior to the Merger.
Combined and separate companies results of Halliburton and Dresser for
the periods preceding the merger are as follows:
Nine Months
Ended Years ended
September 30 December 31
--------------------------------------------------
Millions of dollars 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Revenues:
Halliburton $ 7,044.5 $ 8,818.6 $ 7,385.1
Dresser 6,019.5 7,457.9 6,561.5
- ---------------------------------------------------------------------------------------------------------------
Combined $ 13,064.0 $ 16,276.5 $ 13,946.6
- ---------------------------------------------------------------------------------------------------------------
Net income (loss):
Halliburton $ 359.3 $ 454.4 $ 300.4
Dresser 282.3 318.0 257.5
1998 Special charge, net of tax (722.0) - -
- ---------------------------------------------------------------------------------------------------------------
Combined $ (80.4) $ 772.4 $ 557.9
- ---------------------------------------------------------------------------------------------------------------
LWD Divestiture. In January 1999, in accordance with the consent decree
Halliburton entered into with the U.S. Department of Justice on September 29,
1998, an agreement was reached with W-H Energy Services, Inc. (W-H) for the sale
44
of Halliburton's logging-while-drilling (LWD) and related measurement-while-
drilling (MWD) business known as PathFinder and currently a part of the Energy
Services Group.
Completion of the sale of the PathFinder business was approved by the
Department of Justice on March 3, 1999. The Company expects to incur a loss on
the sale which is expected to be completed in March 1999. Halliburton will
provide separate LWD services through its Sperry Sun business unit, which was
acquired as part of the merger with Dresser and is now a part of Halliburton
Energy Services. In addition, Halliburton will continue to provide sonic LWD
services using its existing technologies, which it will share with PathFinder.
M-I L.L.C. Drilling Divestiture. In August 1998, the Company sold its
36% interest in M-I L.L.C. (M-I) with no significant effect on net income for
the year. M-I was previously a part of the Energy Services Group. See Note 5.
Acquisition of Devonport Royal Dockyard. During March 1997, the
Devonport management consortium, Devonport Management Limited (DML), which is
51% owned by a subsidiary of the Company, completed the acquisition of Devonport
Royal Dockyard plc, which owns and operates the Government of the United
Kingdom's Royal Dockyard in Plymouth, England, for approximately $64.9 million.
Concurrent with the acquisition of the Royal Dockyard, the Company's ownership
interest in DML increased from about 30% to 51% and DML borrowed $56.3 million
under term loans. The dockyard principally provides repair and refitting
services for the British Royal Navy's fleet of submarines and surface ships. DML
is a part of the Engineering and Construction Group.
Acquisition of OGC International and Kinhill. During April 1997, the
Company completed its acquisition of the outstanding common stock of OGC
International plc (OGC) for approximately $118.3 million. OGC is engaged in
providing a variety of engineering, operations and maintenance services,
primarily to the North Sea oil and gas production industry and is a part of the
Energy Services Group.
During July 1997, the Company acquired all of the outstanding common
stock and convertible debentures of Kinhill Holdings Limited (Kinhill) for
approximately $34 million. Kinhill, headquartered in Australia, provides
engineering in mining and minerals processing, petroleum and chemicals, water
and wastewater, transportation and commercial and civil infrastructure. Kinhill
markets its services primarily in Australia, Indonesia, Thailand, Singapore,
India and the Philippines. Kinhill is a part of the Engineering and Construction
Group.
In 1997, the Company recorded approximately $99.1 million excess of
cost over net assets acquired primarily related to the purchase acquisitions of
OGC and Kinhill.
Acquisition of NUMAR. On September 30, 1997, the Company completed its
acquisition of NUMAR through the merger of a subsidiary of the Company with and
into NUMAR, the conversion of the outstanding NUMAR common stock into an
aggregate of approximately 8.2 million shares of common stock of the Company and
the assumption by the Company of the outstanding NUMAR stock options (for the
exercise of which the Company has reserved an aggregate of approximately 0.9
million shares of common stock of the Company). The merger qualified as a
tax-free exchange and was accounted for using the pooling of interests method of
accounting for business combinations. The Company has not restated its financial
statements to include NUMAR's historical operating results because they were not
material to the Company.
NUMAR's assets and liabilities on September 30, 1997 were included in
the Company's accounts of the same date, resulting in an increase in net assets
of $21.3 million. Headquartered in Malvern, Pennsylvania, NUMAR designs,
manufactures and markets the Magnetic Resonance Imaging Logging (MRIL(R)) tool
which utilizes magnetic resonance imaging technology to evaluate subsurface rock
formations in newly drilled oil and gas wells. NUMAR is a part of the Energy
Services Group.
SubSea Asset Sale. In June 1997, a subsidiary of the Company sold
certain assets of its SubSea operations to Global Industries, Ltd. for $102.0
million and recognized a loss of $6.3 million (net of tax of $3.4 million) on
the sale. SubSea is a part of the Energy Services Group.
Environmental Services Divestiture. On December 31, 1997, a subsidiary
of the Company sold its environmental services business to Tetra Tech, Inc. for
approximately $32 million. The sale was prompted by the Company's desire to
divest non-core businesses and had no significant effect on the net income for
the year. The environmental services business was previously a part of the
Engineering and Construction Group.
Landmark Graphics. In October 1996, the Company completed its
acquisition of Landmark through the merger of Landmark with and into a
subsidiary of the Company, the conversion of the outstanding Landmark common
45
stock into an aggregate of approximately 20.4 million shares of common stock of
the Company (after giving effect to the Company's two-for-one stock split) and
the assumption by the Company of the outstanding Landmark stock options. The
merger qualified as a tax-free exchange and was accounted for using the pooling
of interests method of accounting for business combinations. The Company's
financial statements have been restated to include the results of Landmark for
all periods presented prior to the date of completion. Landmark is a part of the
Energy Services Group.
Prior to its acquisition by Halliburton, Landmark had a fiscal year-end
of June 30. Landmark's results have been restated to conform with Halliburton
Company's calendar year-end. Combined and separate results of Halliburton and
Landmark for the periods preceding the merger are as follows:
Nine Months
Ended
--------------------
Millions of dollars September 30, 1996
- ---------------------------------------------------------------------
Revenues:
Halliburton $ 5,251.5
Landmark 143.9
- ---------------------------------------------------------------------
Combined $ 5,395.4
- ---------------------------------------------------------------------
Net income:
Halliburton $ 201.2
Landmark (8.4)
- ---------------------------------------------------------------------
Combined $ 192.8
- ---------------------------------------------------------------------
The Company acquired other businesses in 1998, 1997 and 1996 for $42.0
million, $3.6 million and $32.2 million, respectively. These businesses did not
have a significant effect on revenues or earnings.
Note 15. Financial Instruments and Risk Management
Foreign Exchange Risk. Techniques in managing foreign exchange risk
include, but are not limited to, foreign currency borrowing and investing and
the use of currency derivative instruments. The Company selectively hedges
significant exposures to potential foreign exchange losses considering current
market conditions, future operating activities and the cost of hedging the
exposure in relation to the perceived risk of loss. The purpose of the Company's
foreign currency hedging activities is to protect the Company from the risk that
the eventual dollar cash flows resulting from the sale and purchase of products
in foreign currencies will be adversely affected by changes in exchange rates.
The Company does not hold or issue derivative financial instruments for trading
or speculative purposes.
The Company hedges its currency exposure through the use of currency
derivative instruments. Such contracts generally have an expiration date of two
years or less. Forward exchange contracts (commitments to buy or sell a
specified amount of a foreign currency at a specified price and time) are
generally used to hedge identifiable foreign currency commitments. Losses of
$1.4 million for identifiable foreign currency commitments were deferred at
December 31, 1998. Forward exchange contracts and foreign exchange option
contracts (which convey the right, but not the obligation, to sell or buy a
specified amount of foreign currency at a specified price) are generally used to
hedge foreign currency commitments with an indeterminable maturity date. None of
the forward or option contracts are exchange traded.
While hedging instruments are subject to fluctuations in value, such
fluctuations are generally offset by the value of the underlying exposures being
hedged. The use of some contracts may limit the Company's ability to benefit
from favorable fluctuations in foreign exchange rates. The notional amounts of
open forward contracts and options were $595.9 million and $697.2 million at
year-end 1998 and 1997, respectively. The notional amounts of the Company's
foreign exchange contracts do not generally represent amounts exchanged by the
parties, and thus, are not a measure of the exposure of the Company or of the
46
cash requirements relating to these contracts. The amounts exchanged are
calculated by reference to the notional amounts and by other terms of the
derivatives, such as exchange rates. The Company actively monitors its foreign
currency exposure and adjusts the amounts hedged as appropriate.
Exposures to certain currencies are generally not hedged due primarily
to the lack of available markets or cost considerations (non-traded currencies).
The Company attempts to manage its working capital position to minimize foreign
currency commitments in non-traded currencies and recognizes that pricing for
the services and products offered in such countries should cover the cost of
exchange rate devaluations. The Company has historically incurred transaction
losses in non-traded currencies.
Credit Risk. Financial instruments that potentially subject the Company
to concentrations of credit risk are primarily cash equivalents, investments and
trade receivables. It is the Company's practice to place its cash equivalents
and investments in high quality securities with various investment institutions.
The Company derives the majority of its revenues from sales and services to,
including engineering and construction for, the energy industry. Within the
energy industry, trade receivables are generated from a broad and diverse group
of customers. There are concentrations of receivables in the United States and
the United Kingdom. The Company maintains an allowance for losses based upon the
expected collectibility of all trade accounts receivable.
There are no significant concentrations of credit risk with any
individual counterparty or groups of counterparties related to the Company's
derivative contracts. Counterparties are selected by the Company based on
creditworthiness, which the Company continually monitors, and on the
counterparties' ability to perform their obligations under the terms of the
transactions. The Company does not expect any counterparties to fail to meet
their obligations under these contracts given their high credit ratings and, as
such, considers the credit risk associated with its derivative contracts to be
minimal.
Fair Value of Financial Instruments. The estimated fair value of
long-term debt at year-end 1998 and 1997 was $1,577.6 million and $1,380.8
million, respectively, as compared to the carrying amount of $1,428.2 million at
year-end 1998 and $1,304.3 million at year-end 1997. The fair value of fixed
rate long-term debt is based on quoted market prices for those or similar
instruments. The carrying amount of variable rate long-term debt and restricted
cash (see Note 8) approximates fair value because such instruments reflect
market changes to interest rates. The carrying amount of short-term financial
instruments (cash and equivalents, receivables, short-term notes payable and
accounts payable) as reflected in the consolidated balance sheets approximates
fair value due to the short maturities of these instruments. The fair value of
currency derivative instruments which generally approximates their carrying
amount based upon third party quotes was $4.4 million receivable and $4.7
million payable at December 31, 1998.
Note 16. Retirement Plans
The Company and its subsidiaries have various plans which cover a
significant number of their employees. These plans include defined contribution
plans, which provide retirement contributions in return for services rendered,
provide an individual account for each participant and have terms that specify
how contributions to the participant's account are to be determined rather than
the amount of pension benefits the participant is to receive. Contributions to
these plans are based on pre-tax income and/or discretionary amounts determined
on an annual basis. The Company's expense for the defined contribution plans
totaled $151.8 million, $213.2 million, and $156.0 million in 1998, 1997 and
1996. Other retirement plans include defined benefit plans, which define an
amount of pension benefit to be provided, usually as a function of age, years of
service or compensation. These plans are funded to operate on an actuarially
sound basis. Plan assets are primarily invested in cash, short-term investments,
real estate, equity and fixed income securities of entities domiciled in the
country of the plan's operation.
47
1998 1997
----------------------------------- ----------------------------------
Millions of dollars U.S. International U.S. International
- ----------------------------------------------------------------------------------- ----------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 377.6 $ 1,569.9 $ 386.6 $ 1,361.8
Service cost 5.4 57.3 8.1 44.6
Interest cost 27.3 111.2 29.1 102.7
Plan participants' contributions - 14.0 - 12.7
Effect of business combinations - 20.7 - -
Amendments 13.6 - (16.6) -
Settlements/curtailments (2.3) (9.2) - (1.9)
Currency fluctuations - (1.7) - (1.6)
Actuarial gain/(loss) 37.8 (5.2) 1.9 88.0
Benefits paid (29.1) (41.2) (31.5) (36.4)
- ----------------------------------------------------------------------------------- ----------------------------------
Benefit obligation at end of year $ 430.3 $ 1,715.8 $ 377.6 $ 1,569.9
- ----------------------------------------------------------------------------------- ----------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 421.4 $ 1,775.4 $ 351.0 $ 1,617.6
Actual return on plan assets 38.8 28.4 81.8 158.6
Employer contribution 17.4 25.2 20.1 25.5
Settlements (3.0) - - (1.9)
Plan participants' contributions - 14.0 - 12.7
Effect of business combinations - 20.7 - -
Currency fluctuations - (5.1) - (0.7)
Benefits paid (29.1) (41.2) (31.5) (36.4)
- ----------------------------------------------------------------------------------- ----------------------------------
Fair value of plan assets at end of year $ 445.5 $ 1,817.4 $ 421.4 $ 1,775.4
- ----------------------------------------------------------------------------------- ----------------------------------
Funded status $ 15.2 $ 101.6 $ 43.8 $ 205.5
Unrecognized transition obligation 3.0 (8.1) 0.9 (10.2)
Unrecognized actuarial (gain)/loss 5.1 (59.2) (34.9) (162.7)
Unrecognized prior service cost 1.1 1.5 (17.0) 4.1
- ----------------------------------------------------------------------------------- ----------------------------------
Net amount recognized $ 24.4 $ 35.8 $ (7.2) $ 36.7
- ----------------------------------------------------------------------------------- ----------------------------------
The Company recognized an additional minimum pension liability for
underfunded defined benefit plans. The additional minimum liability is equal to
the excess of the accumulated benefit obligation over plan assets and accrued
liabilities. A corresponding amount is recognized as either an intangible asset
or a reduction of shareholders' equity.
1998 1997
----------------------------------- ----------------------------------
Millions of dollars U.S. International U.S. International
- ----------------------------------------------------------------------------------- ----------------------------------
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost $ 30.9 $ 67.4 $ 21.2 $ 73.7
Accrued benefit liability (33.7) (33.1) (38.2) (38.3)
Intangible asset 17.0 0.4 4.4 0.7
Deferred tax asset 3.7 0.2 1.9 0.2
Accumulated other comprehensive income 6.5 0.9 3.5 0.4
- ----------------------------------------------------------------------------------- ----------------------------------
Net amount recognized $ 24.4 $ 35.8 $ (7.2) $ 36.7
- ----------------------------------------------------------------------------------- ----------------------------------
48
Assumed long-term rates of return on plan assets, discount rates for
estimating benefit obligations and rates of compensation increases vary for the
different plans according to the local economic conditions. The rates used are
as follows:
Weighted-average assumptions as of December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Expected return on plan assets:
United States plans 8.5% to 9.0% 8.5% to 9.0% 8.0% to 9.0%
International plans 7.0% to 11.0% 7.0% to 13.5% 7.0% to 13.5%
Discount rate:
United States plans 7.25% to 8.0% 7.25% to 8.0% 7.0% to 8.0%
International plans 2.0% to 12.5% 7.0% to 12.5% 7.0% to 12.5%
Rate of compensation increase:
United States plans 4.5% to 5.0% 4.0% to 5.5% 4.0% to 5.5%
International plans 2.0% to 11.0% 4.0% to 11.0% 4.0% to 11.0%
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------
Millions of dollars U.S. International U.S. International
- -----------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 5.4 $ 57.3 $ 8.1 $ 44.6
Interest cost 27.3 111.2 29.1 102.7
Expected return on plan assets (30.0) (123.0) (31.4) (127.6)
Transition amount 0.6 (1.9) (0.7) (1.8)
Amortization of prior service cost (4.0) (7.1) (1.1) (7.1)
Settlements/curtailments loss/(gain) (3.9) (2.1) 0.4 -
Recognized actuarial (gain)/loss 0.2 0.1 (0.5) (1.8)
- -----------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ (4.4) $ 34.5 $ 3.9 $ 9.0
- -----------------------------------------------------------------------------------------------------------------------
In 1996 the pension plans had net service cost of $31.3 million; net
interest cost of $73.5 million; net actual return on plan assets of ($109.8
million); and net amortization and deferral of $10.0 million, resulting in net
periodic pension cost of $5 million.
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $201 million, $193 million, and $123
million, respectively, as of December 31, 1998, and $103 million, $97 million,
and $51 million, respectively, as of December 31, 1997.
Postretirement Medical Plan. The Company offers postretirement medical
plans to certain eligible employees. In some plans the Company's liability is
limited to a fixed contribution amount for each participant or dependent. The
plan participants share the total cost for all benefits provided above the fixed
Company contribution and participants' contributions are adjusted as required to
cover benefit payments. The Company has made no commitment to adjust the amount
of its contributions; therefore, the computed accumulated postretirement benefit
obligation amount is not affected by the expected future healthcare cost
inflation rate.
Other postretirement medical plans are contributory but the Company
generally absorbs the majority of the costs. In these plans the Company may
elect to adjust the amount of its contributions. As a result the computed
accumulated postretirement benefit obligation amount is affected by the expected
future healthcare cost inflation rate. These plans have assumed healthcare
trend rates (weighted based on the current year benefit obligation) for 1998 of
7% which are expected to decline to 5% by 2002.
During 1997, the Company adopted amendments to eliminate certain
postretirement medical benefit programs. These amendments resulted in a
curtailment gain of $11.2 million.
49
Millions of dollars 1998 1997
- -----------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 373.0 $ 394.6
Service cost 3.9 4.5
Interest cost 28.4 29.3
Plan participants' contributions 12.0 13.8
Amendments (4.4) 3.0
Settlements/curtailments (6.3) -
Actuarial gain/(loss) 36.8 (30.1)
Benefits paid (40.3) (42.1)
- -----------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 403.1 $ 373.0
- -----------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ - $ -
Employer contribution 28.3 28.3
Plan participants' contributions 12.0 13.8
Benefits paid (40.3) (42.1)
- -----------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ - $ -
- -----------------------------------------------------------------------------------------------------
Funded status $ (403.1) $ (373.0)
Unrecognized actuarial (gain)/loss (66.0) (98.7)
Unrecognized prior service cost (5.4) (6.3)
Unamortized gains from plan amendments (140.2) (155.5)
- -----------------------------------------------------------------------------------------------------
Net amount recognized $ (614.7) $ (633.5)
- -----------------------------------------------------------------------------------------------------
Millions of dollars 1998 1997
- -----------------------------------------------------------------------------------------------------
Amounts recognized in the consolidated
balance sheets consist of:
Accrued benefit liability $ (614.7) $ (633.5)
- -----------------------------------------------------------------------------------------------------
Net amount recognized $ (614.7) $ (633.5)
- -----------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31 1998 1997
- ----------------------------------------------------------------------------------------------------- -
Discount rate 7.0% to 8.0% 7.25% to 8.0%
Expected return on plan assets N/A N/A
Rate of compensation increase 5.0% 5.0%
Millions of dollars 1998 1997
- -----------------------------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 3.9 $ 4.5
Interest cost 28.4 29.3
Amortization of prior service cost (10.3) (10.2)
Settlements/curtailments loss/(gain) - (11.2)
Recognized actuarial (gain)/loss (7.8) (8.8)
- -----------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 14.2 $ 3.6
- -----------------------------------------------------------------------------------------------------
50
In 1996 the postretirement medical plans had net service cost of $4.7
million; net interest cost of $30.9 million; and net amortization and deferral
of ($20.4 million), resulting in net periodic postretirement medical cost of
$15.2 million.
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the total of the healthcare plans. A one-percentage-point
change in assumed healthcare cost trend rates would have the following effects:
1-Percentage-Point 1-Percentage-Point
Millions of dollars Increase Decrease
- -------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 2.7 $ (2.5)
Effect on the postretirement benefit obligation 28.5 (26.9)
- -------------------------------------------------------------------------------------------------------
51
HALLIBURTON COMPANY
Selected Financial Data(a)
Millions of dollars and shares except per share and employee data
Years ended December 31
--------------------------------------------------------------
1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Operating results
Net revenues
Energy Services Group $ 9,009.5 $ 8,504.7 $ 6,515.4 $ 5,307.7
Engineering and Construction Group 5,494.8 4,992.8 4,720.7 3,736.5
Dresser Equipment Group 2,848.8 2,779.0 2,710.5 2,467.4
- -----------------------------------------------------------------------------------------------------------------
Total revenues $ 17,353.1 $ 16,276.5 $ 13,946.6 $ 11,511.6
- -----------------------------------------------------------------------------------------------------------------
Operating income
Energy Services Group $ 971.0 $ 1,019.4 $ 698.0 $ 544.5
Engineering and Construction Group 237.2 219.0 134.0 96.6
Dresser Equipment Group 247.8 248.3 229.3 200.7
Special charges and credits (b) (980.1) (16.2) (85.8) (8.4)
General corporate (79.4) (71.8) (72.3) (70.8)
- -----------------------------------------------------------------------------------------------------------------
Total operating income (b) 396.5 1,398.7 903.2 762.6
Nonoperating income (expense), net (117.7) (85.6) (72.2) (32.6)
- -----------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes and minority interest 278.8 1,313.1 831.0 730.0
Provision for income taxes (d) (244.4) (491.4) (248.4) (247.0)
Minority interest in net income of
consolidated subsidiaries (49.1) (49.3) (24.7) (20.7)
- -----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ (14.7) $ 772.4 $ 557.9 $ 462.3
- -----------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share
Continuing operations $ (0.03) $ 1.79 $ 1.30 $ 1.07
Net income (loss) (0.03) 1.79 1.30 0.88
Diluted income (loss) per share
Continuing operations (0.03) 1.77 1.29 1.07
Net income (loss) (0.03) 1.77 1.29 0.88
Cash dividends per share (e), (f) 0.50 0.50 0.50 0.50
Return on average shareholders' equity (0.35%) 19.17% 15.25% 10.43%
- -----------------------------------------------------------------------------------------------------------------
Financial position
Net working capital $ 2,079.4 $ 1,982.9 $ 1,501.0 $ 1,476.7
Total assets 11,112.0 10,701.8 9,586.8 8,569.4
Property, plant and equipment, net 2,921.6 2,766.4 2,554.0 2,285.0
Long-term debt (including current maturities) 1,428.2 1,304.3 958.0 666.8
Shareholders' equity 4,061.2 4,316.9 3,741.4 3,577.0
Total capitalization 6,004.4 5,671.7 4,830.1 4,377.9
Shareholders' equity per share (e) 9.23 9.86 8.78 8.29
Average common shares outstanding (basic) (e) 438.8 431.1 429.2 431.1
Average common shares outstanding (diluted) (e) 438.8 436.1 432.1 432.3
- -----------------------------------------------------------------------------------------------------------------
Other financial data
Cash flows from operating activities $ 454.1 $ 833.1 $ 864.2 $ 1,094.6
Capital expenditures 914.3 880.1 731.1 591.5
Long-term borrowings (repayments), net 123.3 285.5 287.4 (482.2)
Depreciation and amortization expense 587.0 564.3 497.7 466.4
Payroll and employee benefits 5,880.1 5,478.9 4,674.3 4,188.0
Number of employees (g) 107,800 102,000 93,000 89,800
- -----------------------------------------------------------------------------------------------------------------
52
HALLIBURTON COMPANY
Selected Financial Data (a)
Millions of dollars and shares except per share and employee data
Years ended December 31
----------------------------------------------------------------------------
1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------
Operating results
Net revenues
Energy Services Group $ 4,977.5 $ 5,470.5 $ 5,038.6 $ 5,155.5 $ 4,894.5
Engineering and Construction Group 3,562.3 3,674.9 4,409.6 4,721.2 4,596.8
Dresser Equipment Group 2,452.0 2,281.6 1,660.1 1,760.3 1,622.4
- --------------------------------------------------------------------------------------------------------------------------
Total revenues $ 10,991.8 $ 11,427.0 $ 11,108.3 $ 11,637.0 $ 11,113.7
- --------------------------------------------------------------------------------------------------------------------------
Operating income
Energy Services Group $ 405.8 $ 413.8 $ 303.3 $ 377.8 $ 473.0
Engineering and Construction Group 71.0 76.0 32.2 47.9 50.9
Dresser Equipment Group 198.1 208.4 168.5 163.7 155.1
Special charges and credits (b) (24.6) (426.9) (342.9) (144.7) -
General corporate (56.2) (63.5) (58.3) (56.2) (48.9)
- --------------------------------------------------------------------------------------------------------------------------
Total operating income (b) 594.1 207.8 102.8 388.5 630.1
Nonoperating income (expense), net (c) 323.1 (63.5) (60.7) (20.5) 11.9
- --------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes and minority interest 917.2 144.3 42.1 368.0 642.0
Provision for income taxes (346.9) (95.8) (78.3) (182.5) (269.4)
Minority interest in net income of
consolidated subsidiaries (33.1) (42.8) (8.6) (18.5) (16.6)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 537.2 $ 5.7 $ (44.8) $ 167.0 $ 356.0
- --------------------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share
Continuing operations $ 1.25 $ 0.01 $ (0.11) $ 0.41 $ 0.89
Net income (loss) 1.26 (0.04) (1.18) 0.45 1.11
Diluted income (loss) per share
Continuing operations 1.24 0.01 (0.11) 0.41 0.89
Net income (loss) 1.26 (0.04) (1.18) 0.45 1.11
Cash dividends per share (e), (f) 0.50 0.50 0.50 0.50 0.50
Return on average shareholders' equity 15.47% (0.45%) (12.75%) 4.15% 10.29%
- --------------------------------------------------------------------------------------------------------------------------
Financial position
Net working capital $ 2,196.7 $ 1,562.9 $ 1,423.0 $ 1,775.1 $ 1,905.5
Total assets 8,521.0 8,764.2 8,087.2 8,265.5 7,813.0
Property, plant and equipment, net 2,047.0 2,154.7 2,128.2 1,891.7 1,766.9
Long-term debt (including current maturities) 1,119.8 1,130.9 873.3 928.1 611.7
Shareholders' equity 3,722.5 3,295.7 3,276.6 4,314.8 4,426.0
Total capitalization 4,905.9 4,748.1 4,179.5 5,266.8 5,063.2
Shareholders' equity per share (e), (f) 8.63 7.70 7.99 10.61 11.03
Average common shares outstanding (basic) (e) 430.6 421.9 408.4 405.4 397.8
Average common shares outstanding (diluted) (e) 431.5 422.2 408.7 405.7 398.1
- --------------------------------------------------------------------------------------------------------------------------
Other financial data
Cash flows from operating activities $ 793.1 $ 468.0 $ 624.9 $ 595.2 $ 437.7
Capital expenditures 432.1 463.5 457.5 633.6 494.6
Long-term borrowings (repayments), net (120.8) 192.4 (187.4) 459.5 83.1
Depreciation and amortization expense 487.6 671.6 516.1 440.7 375.5
Payroll and employee benefits 4,222.3 4,428.9 4,590.3 4,660.8 4,415.4
Number of employees (g) 86,500 90,500 96,400 104,500 109,700
- --------------------------------------------------------------------------------------------------------------------------
53
(a) Prior year information presented has been restated for the Merger. Beginning
in 1998, Dresser's year-end of October 31 has been conformed to Halliburton's
calendar year-end. Periods through December 1997 contain Dresser's information
on a fiscal year-end basis combined with Halliburton's information on a calendar
year-end basis.
(b) Operating income includes the following special charges and credits:
1998 - $980.1 million: asset related charges ($509.4 million), personnel
reductions ($234.7 million), facility consolidations ($126.2 million),
merger transaction costs ($64.0 million), and other related costs ($45.8
million).
1997 - $16.2 million: acquisition costs ($8.6 million), restructuring of
joint ventures ($18.0 million), write-downs on impaired assets and early
retirement incentives ($21.6 million), losses from the sale of assets ($9.7
million), and gain on extension of joint venture ($41.7 million).
1996 - $85.8 million: merger costs ($12.4 million), restructuring, merger
and severance costs ($62.1 million), and write-off of acquired in-process
research and development costs ($11.3 million).
1995 - $8.4 million: restructuring costs ($4.7 million) and write-off of
acquired in-process research and development costs ($3.7 million).
1994 - $24.6 million: merger costs ($27.3 million), restructuring costs
($6.2 million), litigation ($9.5 million), and litigation and insurance
recoveries ($18.4 million).
1993 - $426.9 million: loss on sale of business ($321.8 million), merger
costs ($31.0 million), restructuring ($13.2 million), litigation ($65.0
million), and gain on curtailment of medical plan ($4.1 million).
1992 - $342.9 million: merger costs ($272.9 million) and restructuring and
severance ($70.0 million).
1991 - $144.7 million: restructuring ($123.4 million) and loss on sale of
business ($21.3 million).
(c) Nonoperating income in 1994 includes a gain of $275.7 million from the sale
of an interest in Western Atlas International, Inc. and a gain of $102.0 million
from the sale of the Company's natural gas compression business.
(d) Provision for income taxes in 1996 includes tax benefits of $43.7 million
due to the recognition of net operating loss carryforwards and the settlement of
various issues with the Internal Revenue Service.
(e) Weighted average shares, cash dividends paid per share and shareholders'
equity per share have been restated to reflect the two-for-one common stock
split declared on June 9, 1997, and effected in the form of a stock dividend
paid on July 21, 1997.
(f) Represents Halliburton Company amounts prior to the merger with Dresser.
(g) Does not include employees of 50% or less owned affiliated companies.
54
HALLIBURTON COMPANY
Quarterly Data and Market Price Information
(Unaudited)
(Millions of dollars except per share data)
Quarter
--------------------------------------------------------
First Second Third Fourth Year
- ----------------------------------------------------------------------------------------------------------------------
1998 (1)
Revenues $ 4,254.8 $ 4,585.2 $ 4,224.0 $ 4,289.1 $ 17,353.1
Operating income (loss) 361.1 436.1 (577.5) 176.8 396.5
Net income (loss) (7), (8) 203.4 243.2 (527.0) 65.7 (14.7)
Earnings per share:
Basic net income (loss) per share (7), (8) 0.46 0.55 (1.20) 0.15 (0.03)
Diluted net income (loss) per share (7), (8) 0.46 0.55 (1.20) 0.15 (0.03)
Cash dividends paid per share (3) 0.125 0.125 0.125 0.125 0.50
Common stock prices (3), (4)
High 52.44 56.63 45.00 38.56 56.63
Low 42.38 42.06 26.25 26.19 26.19
- ---------------------------------------------------------------------------------------------------------------------
1997 (1)
Revenues $ 3,602.0 $ 4,002.4 $ 4,177.0 $ 4,495.1 $ 16,276.5
Operating income (5), (6) 242.5 321.6 372.2 462.4 1,398.7
Net income (5), (6) 135.1 176.7 202.6 258.0 772.4
Earnings per share: (2)
Basic net income per share (5), (6) 0.32 0.41 0.47 0.59 1.79
Diluted net income per share (5), (6) 0.31 0.41 0.47 0.58 1.77
Cash dividends paid per share (3) 0.125 0.125 0.125 0.125 0.50
Common stock prices (2), (3), (4)
High 36.69 41.00 52.88 62.69 62.69
Low 30.00 32.06 42.00 47.25 30.00
- ---------------------------------------------------------------------------------------------------------------------
(1) Amounts for revenues, operating income, net income, and earnings per share
have been restated to reflect the merger with Dresser which was accounted
for using the pooling of interests method of accounting for business
combinations.
(2) Amounts presented reflect the two-for-one common stock split declared on
June 9, 1997, and effected in the form of a stock dividend paid on July 21,
1997.
(3) Represents Halliburton Company amounts prior to the merger with Dresser.
(4) New York Stock Exchange - composite transactions high and low closing
stock price.
(5) Includes pretax special charge $18.3 million ($14.9 million after tax or
$0.03 per diluted share) in the third quarter of 1997.
(6) Includes pretax special charge net gain of $2.1 million ($5.6 million after
tax and minority interest or $0.01 per diluted share) in the fourth quarter
of 1997.
(7) Includes pretax special charge of $945.1 million ($722.0 million after tax
or $1.64 per diluted share) in the third quarter of 1998.
(8) Includes pretax special charge of $35.0 million ($24.0 million after tax or
$0.05 per diluted share) million in the fourth quarter of 1998.
55
PART III
Item 10. Directors and Executive Officers of Registrant.
The information required for the directors of the Registrant is
incorporated by reference to the Halliburton Company Proxy Statement dated March
25, 1999, under the caption "Election of Directors." The information required
for the executive officers of the Registrant is included under Part I on pages
5 and 6 of this Annual Report.
Item 11. Executive Compensation.
This information is incorporated by reference to the Halliburton
Company Proxy Statement dated March 25, 1999, under the captions "Compensation
Committee Report on Executive Compensation," "Comparison of Five-Year Cumulative
Total Return," "Summary Compensation Table," "Option Grants in Last Fiscal
Year," "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values," "Retirement Plans," "Employment Contracts and Termination of
Employment and Change-in-Control Arrangements" and "Directors' Compensation,
Restricted Stock Plan and Retirement Plan."
Item 12(a). Security Ownership of Certain Beneficial Owners and Management.
This information is incorporated by reference to the Halliburton
Company Proxy Statement dated March 25, 1999, under the caption "Stock Ownership
of Certain Beneficial Owners and Management."
Item 12(b). Security Ownership of Management.
This information is incorporated by reference to the Halliburton
Company Proxy Statement dated March 25, 1999, under the caption "Stock Ownership
of Certain Beneficial Owners and Management."
Item 12(c). Changes in Control.
Not applicable.
Item 13. Certain Relationships and Related Transactions.
This information is incorporated by reference to the Halliburton
Company Proxy Statement dated March 25, 1999, under the caption "Certain
Relationships and Related Transactions."
56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements:
The report of Arthur Andersen LLP, Independent Public Accountants,
and the financial statements of the Company as required by Part II,
Item 8, are included on pages 19 through 51 of this Annual Report.
See index on page 8.
2. Financial Statement Schedules: Page No.
Report on supplemental schedule of Arthur Andersen LLP 65
Schedule II - Valuation and qualifying accounts for
the three years ended December 31, 1998 66
Note: All schedules not filed herein for which provision is made
under rules of Regulation S-X have been omitted as not applicable
or not required or the information required therein has been
included in the notes to financial statements.
3. Exhibits:
Exhibit
Number Exhibits
3.1 Restated Certificate of Incorporation of the Company filed
with the Secretary of State of Delaware on July 23, 1998
(incorporated by reference to Exhibit 3(a) to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998).
3.2 By-laws of the Company, as amended and restated effective
September 29, 1998 (incorporated by reference to Exhibit 3
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998).
4.1 Subordinated Indenture dated as of January 2, 1991 between
Halliburton Company, now known as Halliburton Energy
Services, Inc. (the "Predecessor") and Texas Commerce Bank
National Association, as trustee (incorporated by
reference to Exhibit 4(c) to the Predecessor's
Registration Statement on Form S-3 (File No. 33-38394)
originally filed with the Securities and Exchange
Commission on December 21, 1990), as supplemented and
amended by the First Supplemental Indenture dated as of
December 12, 1996 among the Predecessor, the Company and
the Trustee (incorporated by reference to Exhibit 4.3 of
the Company's Registration Statement on Form 8-B dated
December 12, 1996, File No. 1-03492).
4.2 Form of debt security of 8.75% Debentures due February 12,
2021 (incorporated by reference to Exhibit 4(a) to the
Predecessor's Form 8-K dated as of February 20, 1991).
4.3 Senior Indenture dated as of January 2, 1991 between the
Predecessor and Texas Commerce Bank National Association,
as trustee (incorporated by reference to Exhibit 4(b) to
the Predecessor's Registration Statement on Form S-3 (File
No. 33-38394) originally filed with the Securities and
Exchange Commission on December 21, 1990), as supplemented
57
and amended by the First Supplemental Indenture dated as
of December 12, 1996 among the Predecessor, the Company
and the Trustee (incorporated by reference to Exhibit 4.1
of the Company's Registration Statement on Form 8-B dated
December 12, 1996, File No. 1-03492).
4.4 Resolutions of the Predecessor's Board of Directors
adopted at a meeting held on February 11, 1991 and of the
special pricing committee of the Board of Directors of the
predecessor adopted at a meeting held on February 11, 1991
and the special pricing committee's consent in lieu of
meeting dated February 12, 1991 (incorporated by reference
to Exhibit 4(c) to the Predecessor's Form 8-K dated as of
February 20, 1991).
4.5 Form of debt security of 6.75% Notes due February 1, 2027
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated as of February 11, 1997).
4.6 Second Senior Indenture dated as of December 1, 1996
between the Predecessor and Texas Commerce Bank National
Association, as trustee, as supplemented and amended by
the First Supplemental Indenture dated as of December 5,
1996 between the Predecessor and the trustee and the
Second Supplemental Indenture dated as of December 12,
1996 among the Predecessor, the Company and the Trustee
(incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form 8-B dated December 12,
1996, File No. 1-03492).
* 4.7 Third Supplemental Indenture dated as of August 1, 1997
between the Company and Texas Commerce Bank National
Association, as Trustee, to the Second Senior Indenture
dated as of December 1, 1996.
* 4.8 Fourth Supplemental Indenture dated as of September 29,
1998 between the Company and Chase Bank of Texas, National
Association (formerly Texas Commerce Bank National
Association), as Trustee, to the Second Senior Indenture
dated as of December 1, 1996.
4.9 Resolutions of the Company's Board of Directors adopted by
unanimous consent dated December 5, 1996 (incorporated by
reference to Exhibit 4(g) of the Company's Annual Report
on Form 10-K for the year ended December 31, 1996).
* 4.10 Resolutions of the Company's Board of Directors adopted at
a special meeting held on September 28, 1998.
4.11 Restated Rights Agreement dated as of December 1, 1996
between the Company and ChaseMellon Shareholder Services,
L.L.C. (incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement on Form 8-B dated
December 12, 1996, File No. 1-03492).
4.12 Copies of instruments that define the rights of holders of
miscellaneous long-term notes of the Company and its
subsidiaries, totaling $39.6 million in the aggregate at
December 31, 1998, have not been filed with the
Commission. The Company agrees herewith to furnish copies
of such instruments upon request.
4.13 Form of debt security of 7.53% Notes due May 12, 2017
(incorporated by reference to Exhibit 4.4 to the Company's
Form 10-Q for the quarterly period ended March 31, 1997).
58
4.14 Form of debt security of 6.27% Notes due July 8, 1999
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated as of July 8, 1997).
4.15 Form of debt security of 6.30% Notes due August 5, 2002
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated as of August 5, 1997).
4.16 Form of debt security of 5.63% Notes due December 1, 2008
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated as of November 24, 1998).
4.17 Form of Indenture, between Dresser Industries, Inc.
("Dresser") and NationsBank of Texas, N.A., as Trustee,
for unsecured debentures, notes and other evidences of
indebtedness (incorporated by reference to Exhibit 4.1 to
Dresser's Registration Statement on Form S-3, Registration
No. 33-59562).
4.18 Form of Indenture, between Baroid Corporation and Texas
Commerce Bank National Association, as trustee, for 8%
Senior Notes due 2003 (incorporated by reference to
Exhibit 4.01 to the Registration Statement on Form S-3,
Registration No. 33-60174), as supplemented and amended by
Form of Supplemental Indenture, between Dresser, Baroid
Corporation and Texas Commerce Bank N.A. as Trustee, for
8% Guaranteed Senior Notes due 2003 (incorporated by
reference to Exhibit 4.3 to Registration Statement on Form
S-4 filed by Baroid Corporation, Registration No.
33-53077).
* 4.19 Second Supplemental Indenture dated October 30, 1997
between Dresser and Texas Commerce Bank National
Association, as Trustee, for 8% Senior Notes due 2003.
* 4.20 Third Supplemental Indenture dated September 29, 1998
between Dresser, the Company, as Guarantor, and Chase Bank
of Texas, National Association, as Trustee, for 8% Senior
Notes due 2003.
4.21 Form of Indenture, between Dresser and Texas Commerce Bank
National Association, as Trustee, for 7.60% Debentures due
2096 (incorporated by reference to Exhibit 4 to the
Registration Statement on Form S-3 as amended,
Registration No. 333-01303), as supplemented and amended
by Form of Supplemental Indenture, between Dresser and
Texas Commerce Bank National Association, Trustee, for
7.60% Debentures due 2096 (incorporated by reference to
Exhibit 4.1 to Dresser's Form 8-K filed on August 9,
1996).
10.1 Halliburton Company Career Executive Incentive Stock Plan
as amended November 15, 1990 (incorporated by reference to
Exhibit 10(a) to the Predecessor's Annual Report on Form
10-K for the year ended December 31, 1992).
10.2 Retirement Plan for the Directors of Halliburton Company
adopted and effective January 1, 1990 (incorporated by
reference to Exhibit 10(c) to the Predecessor's Annual
Report on Form 10-K for the year ended December 31, 1992).
10.3 Halliburton Company Directors' Deferred Compensation Plan
as amended and restated effective May 1, 1994
(incorporated by reference to Exhibit 10(c) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
* 10.4 Halliburton Company 1993 Stock and Long-Term Incentive
Plan, as amended and restated February 19, 1998.
59
10.5 Halliburton Company Restricted Stock Plan for Non-Employee
Directors (incorporated by reference to Appendix B of the
Predecessor's proxy statement dated March 23, 1993).
10.6 Halliburton Elective Deferral Plan, as amended and
restated effective January 1, 1998 (incorporated by
reference to Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1998).
10.7 Employment agreement (incorporated by reference to Exhibit
10 to the Predecessor's Form 10-Q for the quarterly period
ended September 30, 1995).
* 10.8 Halliburton Company Senior Executives' Deferred
Compensation Plan, as amended and restated effective
January 1, 1999.
10.9 Halliburton Company Annual Performance Pay Plan, as
amended and restated effective January 1, 1997
(incorporated by reference to Exhibit 10(k) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.10 Employment agreement (incorporated by reference to Exhibit
10(n) to the Predecessor's Form 10-K for the year ended
December 31, 1995).
10.11 Halliburton Company 1993 Stock and Long-Term Incentive
Plan, as amended and restated February 19, 1998
(incorporated by reference to Exhibit 10(n) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.12 Agreement and Plan of Merger, dated as of February 25,
1998, by and among the Company, Halliburton N.C., Inc. and
Dresser (incorporated by reference to Exhibit C to the
Company's Schedule 13D filed on March 9, 1998).
10.13 Stock Option Agreement, dated as of February 25, 1998, by
and between the Company and Dresser (incorporated by
reference to Exhibit B to the Company's Schedule 13D filed
on March 9, 1998).
10.14 Employment agreement and amendment thereto (incorporated
by reference to Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1998).
10.15 Employment agreement and amendment thereto (incorporated
by reference to Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1998).
* 10.16 Employment agreement.
* 10.17 Employment agreement.
* 10.18 Employment agreement.
* 10.19 Employment agreement.
* 10.20 Early retirement agreement.
60
* 10.21 Early retirement agreement.
10.22 Dresser Industries, Inc. Deferred Compensation Plan
(incorporated by reference to Exhibit A to Dresser's Proxy
Statement dated February 11, 1966, filed pursuant to
Regulation 14A, File No. 1-4003).
10.23 Dresser Industries, Inc. 1982 Stock Option Plan
(incorporated by reference to Exhibit A to Dresser's Proxy
Statement dated February 12, 1982, filed pursuant to
Regulation 14A, File No. 1-4003).
10.24 ERISA Excess Benefit Plan for Dresser Industries, Inc. as
amended and restated effective June 1, 1995 (incorporated
by reference to Exhibit 10.7 to Dresser's Form 10-K for
the year ended October 31, 1995).
10.25 ERISA Compensation Limit Benefit Plan for Dresser
Industries, Inc., as amended and restated effective June
1, 1995 (incorporated by reference to Exhibit 10.8 to
Dresser's Form 10-K for the year ended October 31, 1995).
10.26 Supplemental Executive Retirement Plan of Dresser
Industries, Inc., as amended and restated effective
January 1, 1998 (incorporated by reference to Exhibit 10.9
to Dresser's Form 10-K for the period ended October 31,
1997).
10.27 Stock Based Compensation Arrangement of Non-Employee
Directors (incorporated by reference to Exhibit 4.4 to
Dresser's Registration Statement on Form S-8, Registration
No. 333-40829).
10.28 Dresser Industries, Inc. Deferred Compensation Plan for
Non-employee Directors, as restated and amended effective
November 1, 1997 (incorporated by reference to Exhibit
4.5 to Dresser's Registration Statement on Form S-8,
Registration No. 333-40829).
10.29 Dresser Industries, Inc. 1989 Restricted Incentive Stock
Plan (incorporated by reference to Exhibit A to Dresser's
Proxy Statement dated February 10, 1989, filed pursuant to
Regulation 14A, File No. 1-4003).
10.30 Long-Term Performance Plan for Selected Employees of The
M. W. Kellogg Company (incorporated by reference to
Exhibit 10(r) to Dresser's Form 10-K for the year ended
October 31, 1991).
10.31 Dresser Industries, Inc. 1992 Stock Compensation Plan
(incorporated by reference to Exhibit A to Dresser's Proxy
Statement dated February 7, 1992, filed pursuant to
Regulation 14A, File No. 1-4003).
10.32 Amendments No. 1 and 2 to Dresser Industries, Inc. 1992
Stock Compensation Plan (incorporated by reference to
Exhibit A to Dresser's Proxy Statement dated February 6,
1995, filed pursuant to Regulation 14A, File No. 1-4003).
10.33 Dresser Industries, Inc. 1995 Executive Incentive
Compensation Plan (incorporated by reference to Exhibit B
to Dresser's Proxy Statement dated February 6, 1995, filed
pursuant to Regulation 14A, File No. 1-4003).
61
10.34 Special 1997 Restricted Incentive Stock Grant
(incorporated by reference to Exhibit 10.26 to Dresser's
Form 10-K for the year ended October 31, 1996).
10.35 Form of Executive Life Insurance Agreement (individual as
beneficiary) (incorporated by reference to Exhibit 10.22
to Dresser's Form 10-K for the period ended October 31,
1997).
10.36 Form of Executive Life Insurance Agreement (trust as
beneficiary) (incorporated by reference to Exhibit 10.23
to Dresser's Form 10-K for the period ended October 31,
1997).
10.37 Amendment No. 3 to the Dresser Industries, Inc. 1992 Stock
compensation Plan (incorporated by reference to Exhibit
10.25 to Dresser's Form 10-K for the period ended October
31, 1997).
10.38 The Dresser Industries, Inc. 1998 Executive Incentive
Compensation Plan (incorporated by reference to Exhibit B
to Dresser's Proxy Statement dated February 10, 1998,
filed pursuant to Regulation 14A, File No. 1-4003).
10.39 Form of Waiver of Rights Under the Dresser Industries,
Inc. Long-Term Incentive and Retention Plan (incorporated
by reference to Exhibit 10.5 to Dresser's Form 10-Q for
the period ended January 31, 1998).
10.40 Amendment No. 1 to the Supplemental Executive Retirement
Plan of Dresser Industries, Inc. (incorporated by
reference to Exhibit 10.1 to Dresser's Form 10-Q for the
period ended April 30, 1998).
* 21 Subsidiaries of the Registrant.
* 23.1 Consent of Arthur Andersen LLP.
* 23.2 Consent of PricewaterhouseCoopers LLP.
24.1 Powers of attorney for the following directors signed in
February, 1997 (incorporated by reference to Exhibit 24 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1996):
Anne L. Armstrong
Richard B. Cheney
Lord Clitheroe
Robert L. Crandall
W. R. Howell
Delano E. Lewis
C. J. Silas
Richard J. Stegemeier
24.2 Power of attorney signed in December 1997 for Charles J.
DiBona (incorporated by reference to Exhibit 24(b) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
62
* 24.3 Powers of attorney for the following directors signed in
October, 1998:
William E. Bradford
Lawrence S. Eagleburger
Ray L. Hunt
J. Landis Martin
Jay A. Precourt
* 27 Financial data schedule for the Registrant (filed
electronically).
* 99.1 Report of independent accountants, PriceWaterhouseCoopers
LLP.
* Filed with this Form 10-K
- --------------------------------------------------------------------------------
(b) Reports on Form 8-K:
During the fourth quarter of 1998:
A Current Report on Form 8-K dated September 29, 1998, was filed reporting on
Item 5. Other Events, regarding a press release dated September 29, 1998
announcing the completion of the Merger between the Company and Dresser
Industries, Inc.
A Current Report on Form 8-K dated September 29, 1998, was filed reporting on
Item 2. Acquisition or Disposition of Assets, regarding the acquisition of
Dresser Industries, Inc., pursuant to the plan of merger dated as of February
25, 1998.
A Current Report on Form 8-K/A dated September 29, 1998, was filed reporting on
Item 2. Acquisition or Disposition of Assets, regarding the acquisition of
Dresser Industries, Inc., and included supplemental financial statements for
Halliburton Company for the three years ended December 31, 1997 and six months
ended June 30, 1998.
A Current Report on Form 8-K dated October 29, 1998, was filed reporting on Item
5. Other Events, regarding a press release dated October 29, 1998, announcing
third quarter earnings.
A Current Report on Form 8-K dated October 30, 1998, was filed reporting on Item
5. Other Events, regarding a press release dated October 30, 1998 announcing
the fourth quarter dividend.
A Current Report on Form 8-K dated November 19, 1998, was filed reporting on
Item 5. Other Events, regarding a press release dated November 19, 1998
announcing Halliburton Company $150 million notes offering.
A Current Report on Form 8-K dated November 24, 1998, was filed reporting on
Item 5. Other Events, regarding the $150 million notes offering and the filing
of the final copy of the Terms Agreement and the form of Note.
A Current Report on Form 8-K dated November 30, 1998, was filed reporting on
Item 5. Other Events, regarding a press release dated November 30, 1998
announcing Dresser Industries, Inc. Change of Control Offer to purchase all
outstanding and guaranteed senior notes of Baroid Corporation.
63
(b) Reports on Form 8-K (continued):
A Current Report on Form 8-K dated December 28, 1998, was filed reporting on
Item 5. Other Events, regarding a press release dated December 28, 1998
announcing a $35 million pretax special charge in the 1998 fourth quarter to
provide for reduction of personnel.
During the first quarter of 1999 to date:
A Current Report on Form 8-K dated January 22, 1999, was filed reporting on Item
5. Other Events, regarding a press release dated January 22, 1999 announcing
that the Company has entered into an agreement with W-H Energy Services, Inc.
for the sale of the Company's logging-while-drilling (LWD) and related
measurement-while-drilling (MWD) business.
A Current Report on Form 8-K dated January 25, 1999, was filed reporting on Item
5. Other Events, regarding a press release dated January 25, 1999 announcing
fourth quarter earnings.
A Current Report on Form 8-K dated February 18, 1999, was filed reporting on
Item 5. Other Events, regarding a press release dated February 18, 1999
announcing declaration of the first quarter dividend.
64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
To Halliburton Company:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in this Form 10-K, and
have issued our report thereon dated January 25, 1999. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
supplemental schedule (Schedule II) is the responsibility of Halliburton
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
------------------------------
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 25, 1999
65
HALLIBURTON COMPANY
Schedule II - Valuation and Qualifying Accounts
(Millions of Dollars)
Additions
------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions End of
Descriptions of Period Expenses Accounts (A) Period
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
Deducted from accounts and notes receivable:
Allowance for bad debts $ 58.6 $ 26.5 $ - $ (8.5) $ 76.6
- --------------------------------------------------------------------------------------------------------------------------
Accrued special charges $ 13.1 $ 1,010.3 (B) $ - $ (597.0) $ 426.4
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Deducted from accounts and notes receivable:
Allowance for bad debts $ 65.3 $ 13.7 $ - $ (20.4) $ 58.6
- --------------------------------------------------------------------------------------------------------------------------
Accrued special charges $ 57.7 $ 16.2 $ - $ (60.8) $ 13.1
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996:
Deducted from accounts and notes receivable:
Allowance for bad debts $ 62.7 $ 15.8 $ - $ (13.2) $ 65.3
- --------------------------------------------------- ------------ ---------------- ------------- ------------- ------------
Accrued special charges $ 0.0 $ 85.8 $ - $ (28.1) $ 57.7
- --------------------------------------------------- ------------ ---------------- ------------- ------------- ------------
(A) Receivable write-offs and reclassifications, net of recoveries.
(B) Includes $980.1 million during the calendar year ended December 31, 1998
and $30.2 million during Dresser's two-month period ended December 31,
1997. See Note 14.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 22nd day of March,
1999.
HALLIBURTON COMPANY
By /s/ Richard B. Cheney
------------------------------------
Richard B. Cheney
Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities indicated on
this 22nd day of March, 1999.
Signature Title
- ------------ -----------
/s/ Richard B. Cheney Chief Executive Officer and Director
- -------------------------------
Richard B. Cheney
/s/ Gary V. Morris Executive Vice President and
- ------------------------------- Chief Financial Officer
Gary V. Morris
/s/ R. Charles Muchmore, Jr. Vice President and Controller and
- ------------------------------- Principal Accounting Officer
R. Charles Muchmore, Jr.
67
Signature Title
- ------------ -----------
* ANNE L. ARMSTRONG Director
- -------------------------------
Anne L. Armstrong
* WILLIAM E. BRADFORD Chairman of the Board and Director
- -------------------------------
William E. Bradford
* LORD CLITHEROE Director
- -------------------------------
Lord Clitheroe
*ROBERT L. CRANDALL Director
- -------------------------------
Robert L. Crandall
* CHARLES J. DIBONA Director
- -------------------------------
Charles J. DiBona
* LAWRENCE S. EAGLEBURGER Director
- -------------------------------
Lawrence S. Eagleburger
* W. R. HOWELL Director
- -------------------------------
W. R. Howell
* RAY L. HUNT Director
- -------------------------------
Ray L. Hunt
*DELANO E. LEWIS Director
- -------------------------------
Delano E. Lewis
* J. LANDIS MARTIN Director
- -------------------------------
J. Landis Martin
* JAY A. PRECOURT Director
- -------------------------------
Jay A. Precourt
* C. J. SILAS Director
- -------------------------------
C. J. Silas
* RICHARD J. STEGEMEIER Director
- -------------------------------
Richard J. Stegemeier
* /s/ SUSAN S. KEITH
- ----------------------------------------
Susan S. Keith, Attorney-in-fact
68